An individual shift houses influenced by a combination of factors such as job relocation, change in lifestyle, and retirement. On the sale of such residential house property capital gains are incurred. However, the intention of selling the house property often is not to earn income but to acquire a suitable house. Thus, the Income Tax department has provided Capital Gain Exemption on the sale of such residential house property by the taxpayer. The taxpayer on fulfilling certain conditions can claim exemptions to reduce their Capital Gains Tax. Exemption under Section 54 of the Income Tax Act is available on Capital Gains on the sale of residential house property.
Exemption under Section 54 of the Income Tax Act is available on Capital Gains on the sale of one residential house property and the purchase or construction of another residential house property. The amount of Exemption under Section 54 will be lower of:
A taxpayer can claim capital gain exemption on the sale of a house property under Section 54 if they satisfy all the below conditions:
If LTCG is up to 2 crores then the assessee can acquire two residential house property within the prescribed time limit. This benefit of two house property is available only once in a lifetime.
If LTCG is up to 2 crores then the assessee can acquire two residential house property within the prescribed time limit. This benefit of two house property is available only once in a lifetime.
The amount of Exemption under Section 54F will be available as per the following criteria:
Note: In Budget 2023, Finance Minister Nirmala Sitharaman has announced that capital gain tax exemption is capped at ₹ 10 crores on the sale of the first residential property under section 54 with effect from 1st April 2023.
Example: Jayni sold a house property in FY 2023-24 for ₹ 40 crores. She purchased the property in FY 2016-17 for ₹ 20 crores. She purchased a new house property worth ₹18 crores in another city. Jayni will be able to claim a deduction under section 54 as follows:
| Particulars | Amount(₹) |
| Sales Consideration | 40,00,00,000 |
| Less: Purchase Price Index Cost of Acquisition (20,00,00,000*348/264) | (26,36,36,364) |
| Long-Term Capital Gains | 13,63,63,636 |
| New House Property Purchase Price | 18,00,00,000 |
| Section 54 Exemption Amount | 10,00,00,000 |
In this case, Jayni will be eligible to take an exemption of a maximum of ₹10 crores as the house property is sold after April 1, 2023, and on the remaining exceeding amount of ₹3,63,63,636 taxes will be levied at 20%.
The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54 of the Income Tax Act. The following situations can arise:
When the taxpayer sells the new residential house within 3 years from the date of purchase or construction and the cost of the new house purchased is less than Capital Gains.
Consequences: The exemption under Section 54 is withdrawn. The total sales value of the new house property will be taxable as capital gains. Here the cost of acquisition will be NIL.
When the taxpayer sells the new residential house within 3 years from the date of purchase or construction and the cost of the new house purchased is more than Capital Gains.
Consequences: The exemption under Section 54 is withdrawn. However, the taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54) while calculating capital gains.
When the taxpayer sells the new residential house after 3 years from the date of purchase or construction.
Consequences: The exemption under Section 54 is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating the capital gain on the sale of house property. The taxpayer must pay income tax on capital gains at the rate of 20%.
If a taxpayer is unable to utilize the whole or part of the sales consideration for the purchase or construction of new property till the due date of submission of ITR, they should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim an exemption of the amount already spent on construction or purchase of property along with the amount deposited in CGAS. However, it is important to note that if the taxpayer is unable to utilize the amount deposited in the Capital Gains Account Scheme within the time limit of 3 years, then it shall be taxable as income of the last year.
Can I claim an exemption if I buy a new property in the name of my spouse? No. In order to claim exemption u/s 54, the property that the taxpayer purchases must be in the name of the seller. The exemption is not available if a new property is purchased in the name of the spouse.
Can NRI claim an exemption under Section 54 on the purchase of a House Property? Yes, NRI can claim exemption under Section 54 of the Income Tax Act. However, it is mandatory that the old house property be sold and the new house property purchased is situated in India.
Is exemption allowed if the builder of a property fails to hand it over within 3 years? Yes. The taxpayer can claim the exemption under Section 54 even when the builder of a property fails to hand over the possession of the property.
Can we claim exemption u/s 54, if 2 adjacent house property is purchased? If the taxpayer purchases two adjacent flats and makes modifications and makes it one then it shall be considered as one for exemption even if the sellers are different.
What is the difference between sections 54 and 54F? Exemption u/s 54 can be claimed for Long-term capital gain on the sale of residential property. However, exemption u/s 54F can be claimed for the Long-term capital gain on the sale of capital assets other than residential house property.
