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2015

Capital Gain Taxability and Exemptions - Understand Section 54,54F

Capital Gain Exemptions

  • Real Estate Market has always been seen as an investment avenue for promising returns for many investors in the past couple of decades. It even delivered the best returns compared to other investments in the recent past. Perhaps the real estate market has been visiting a sluggish trend in last one or two years but things have hardly mattered for those who are still banking on the thought that such situation will be corrected by Government policies. There are others who rely on the market sentiments alike the stock markets. Buying a house or investing in land and then selling it at the higher price once the estate market gives a promised return is a common practice and is done by many. But are we completely aware of the taxation aspects as well?
  • The Income Tax Department has inserted certain exemption provisions for those who have a dream to buy their own house or a bigger house than the existing one. On a plain reading of the provisions relating to exemptions of the Income Tax Act, 1961 pertaining to capital gains one may conclude that the above statement is just perfect.
  • Capital gains are simply profits earned or losses incurred on disposing of a capital asset. Capital gain arises when a house property is sold for profit. However one may also incur the loss, say if a property is sold at a price less than its acquisition cost one may incur a capital loss as well.
  • Let us understand how a gain or loss is calculated.
    Capital Gain = Sale Consideration – Indexed Cost of acquisition – Indexed Cost of Improvement,
  • Ordinarily sale consideration means agreement value for which the house is sold and any other consideration received over and above the sale consideration less any other selling expenses incurred directly for selling the property for example Brokerage etc.
  • The cost of Acquisition means the buying price of the house property as mentioned in the sale agreement.
  • The cost of Improvement means any cost incurred for major repairs or alterations to the house property.
  • However in order to give the benefit of inflation to the purchase price, the IT department allows indexation on the purchase price. Indexation is yet another method to arrive at the real price of the property as on the year of sale. Index figures are published by the government for every financial year. The taxpayer has an option to claim indexation or to forgo the same.

Taxability of Capital Gain

Sec 54

  • This is the section for availing tax benefit on long term capital gains arising from a residential property. Under this section if a residential house is sold after three years of purchase then one can avail tax exemptions on the gains by investing them in following options –
    1. A new residential property either bought within two years or constructed within three years from the date of transfer of existing property. In the case of buying a new property, the exemption is available even if it is bought within one year before the date of transfer.
    2. There might be a situation when you would not have decided on a new property but do not want to lock in the money in the bonds. In such instances, the money has to be deposited in a Capital Gains Account Scheme.
    3. The entire capital gains will be exempted where the amount of investment in new property is equal or greater than the capital gains earned.
  • One of the larger benefits of Section 54 is that one can hold a number of properties as on the date of transfer and still claim exemption on the gains.

Sec 54F

  • This section is available to all those assets other than residential houses. So for claiming long-term capital gains arising from selling off land also, this section can be utilized.
  • Here one can claim relief on the tax liability on capital gains but with following conditions:
    The options for claiming exemption are the same as under sec 54.
  • The amount of exemption available is derived as
    Amount of investment x Capital Gains/Net Consideration
  • One of the primary conditions which differentiate this section from Sec 54 is that the assessee can hold only one property other than the new residential property on the date of transfer.
  • Thus, if one has made gains form a land then the exemption can be availed under Section 54F provided the conditions laid in the section are fulfilled.
  • Unlike Sec 54, here the entire capital gains are exempted when the amount of investment is equal or greater than the net consideration/ sale proceeds else the proportionate exemption is allowed.
  • In both Sec 54 & Sec 54F, the exempted property cannot be sold within three years of acquisition else the taxability on gains will arise with respective section clauses. Both these sections are available to property investors for claiming long-term capital gains tax exemptions. Differences between these two Sections:
    Section 54 Section 54F
    To claim full exemption the entire capital gains have to be invested. To claim full exemption the entire sale receipts have to be invested.
    In case entire capital gains are not invested – the amount not invested is charged to tax as long-term capital gains. In case entire sale receipts are not invested, the exemption is allowed proportionately.
    [Exemption = Cost the new house x Capital Gains/Sale Receipts]
    This exemption will be reversed if you sell this new property within 3 years of purchase and capital gains from the sale of the new property will be taxed as short-term capital gains. This exemption will be reversed if you sell this new property within 3 years of its purchase or construction OR if you purchase another residential house within 2 years of the sale of the original asset or construct a residential house other than the new house within 3 years of the sale of the original asset. Capital gains from the sale will be taxed as long-term capital gains.

Example

  • Suppose an individual has a long-term asset (other than residential property) & he sells it on 1st April, 2013 for Rs. 15,00,000/-. Suppose the indexed cost of the asset is Rs. 8,00,000/- then
    Long Term Capital Gain will be = 15,00,000 – 8,00,000 = Rs. 7,00,000/-
  • In order to get full exemption u/s 54 F he will have to invest the full sale consideration of Rs15,00,000/- in construction, of a house property before 31st March, 2016 or purchase a new residential house property before 31st March, 2015.If he has already purchased a residential house property on or after 1st April , 2012 then the amount invested can be adjusted with the purchase price of this property.
  • If only part amount is invested, e.g. if only Rs. 10,00,000 is invested then proportionate exemption is available i.e. Amount of Exemption= 700000 x (1,00,00,000/15,00,000) = Rs. 4,66,667/-

Capital Gain Account Scheme

    If the new asset is not acquired up to the date of submission of return of income, then the tax payers will have to deposit money in “Capital Gain Deposit scheme” with a nationalized bank. The proof of deposit should be submitted along with the return of income. On the basis of actual investment and the amount deposited in the deposit account, an exemption will be given to the taxpayer.

Summary of Exemptions Section 54, 54F of Income Tax Act, 1961

  • The assessee can claim exemption from capital gains on sale of residential house property under the following sections:
    PARTICULARS SEC 54 SEC 54F
    Exemption claimed by Individual /HUF Individual /HUF
    Capital Asset Long Term Long Term
    Eligible Specific Asset Residential House Any LTCA other than a residential house property, provided on the date of transfer of asset, the tax payer does not own more than one residential house property
    Type of asset to be acquired to get the benefit of exemption Residential House Residential House
    Time limit for acquiring the asset from a date of sale 1. Purchase before 1 year or 2 yrs after.
    2. Construction within 3 yrs
    1. Purchase before 1 year or 2 yrs after.
    2. Construction within 3yrs
    Relevant date for acquiring the new asset From the date of transfer of house property but in case of compulsory acquisition from the date of compensation From the date of transfer of capital asset but in case of compulsory acquisition from the date of receipt of
    Amount exempted Investment in the new asset or capital gain, whichever is lower. Investment in the new asset/net sale consideration capital gain
    Revocation of Exemption in a subsequent year If the new asset is transferred within 3 yrs of its acquisition. If the new asset is transferred within 3 yrs of its acquisition. If another residential house is purchased within 2 yrs of transfer of the original asset, or If another residential house is constructed within 3 yrs of the transfer of original asset.
    When the exemption is revoked it is taxable as LTCG / STCG in the year in which the default is committed Short Term Capital Gain Long Term Capital Gain
    Capital Gain Deposit Scheme Applicable Applicable
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