Capital Gains, Income Tax

Income Tax implication of capital gains on sale of property (Section 54 and Section 54 EC)

Sale and purchase of residential property is one of the large transaction that a person undertakes in his life. Generally the gain on such sale is large, hence the tax treatment of such gain is extremely important.

The Income Tax department has exempted capital gains on sale of property by individuals in certain situations. The purpose of the deduction is to ensure end use of the funds in a beneficial way for the individual, for example by purchasing another residential property or investing in long term assets/bonds such as those of Rural Electrification Corporation.

The two major sections under which exemption can be claimed are Section 54 and Section 54 EC. It is important to note that there are several intricacies relating to claiming exemption, for example such as whether extension of house will qualify for exemption or whether the new property should be only in the name of the assessee. These will need to be carefully considered.. Read more on our blog at RupeeTax.com

Section 54

Assessee – Individual

Asset transferred – Land, building or both (LTCA) comprising residential house.

If an individual has sold property (land, building, apartment) during the financial year, the entire capital gains will be exempted from tax.

Investment in purchase of new residential House Property in India.

However such purchase should be within 1 year of before the date of transfer and 2 years after the date of transfer and in case of construction the same should be completed within 3 years after the date of such transfer.

The house should not be sold within period of three years otherwise the gains would become taxable.

Amount of exemption: Te capital gains that would otherwise have to be paid i.e. the entire sales proceeds from sale of property need not be invested.

Section 54EC

Assessee – Any person

Asset transferred – Land, building or both (LTCA)

The capital gains wll be exempt if the assessee purchases within 6 months from the date of transfer investments in the following bonds which are redeemable after 5 years(Issued after  1st April, 2018):

1.      National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988

2.       by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956

or any other bond notified by the Central Government in this behalf.

The assessee cannot take a loan against these bonds.

Further, new assets should not be transferred within 5 years .If the bonds are transferred then the same shall be taxable in the year of transfer.

Amount of exemption: The capital gains that would otherwise have to be paid i.e. the entire sales proceeds from sale of property need not be invested.  Maximum Exemption limit under this section is Rs.50 lakhs.

Leave a Comment

Your email address will not be published. Required fields are marked *