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2018

Sections 54, 54F and 54EC of Income Tax Act: Exemptions in respect of LTCG

Sections 54 54F and 54EC of Income Tax Act Exemptions in respect of LTCG

The amount of long term capital gain arising from sell of long term capital assets like house property is very large. Such gains are taxed at 20% as long term capital gain tax. The tax amount payable in such cases comes up to be very high. In order to provide relief to the tax payers, the Government of India has come up with certain exemptions from Long Term Capital Gain under section 54, 54EC and 54F. Let us understand these sections into detail:

Section 54:

 In order to claim benefit of tax exemption under section 54, following conditions must be satisfied:

          •  The benefit of section 54 is available only to an individual or HUF.

          •  The asset transferred should be a long-term capital asset, being a residential house property.

          •  Taxpayer must acquire another residential house within a period of one year before or two years after the date of transfer of old house

OR

          •    Should construct a residential house within a period of three years from the date of transfer of the old house.

Note:
With effect from assessment year 2015-16 exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India.

How much deduction can be claimed under section 54?

The amount which can be claimed under section 54 is least of the following:

            Long Term Capital Gain

          •  Cost of new residential house property

What is Capital Gain Account?

Though an assessee is given a time period of 2 years to invest in a new house property or 3 years to construct a new house, the LTCG arising from sell of house property becomes taxable in the previous year in which house property is sold.


Capital Gain Account is for such assessees who wish to take benefit of section 54 but does not want to buy a new house property before due date of return filing in the current assessment year. In such a case, an assessee can open a Capital Gain Account and deposit the amount equal to expected cost of acquisition/construction of new house property. However, such amount must be deposited before the due date of return filing for the relevant previous year. Later on, assessee can utilise such amount in the acquisition / construction of a new house property.

In case if an assessee fails to utilise the amount deposited in Capital Gain Account for acquisition / construction of a new house property within specific time period, the amount becomes taxable as long term capital gain on completion of three years from the date of sale of old house property.

Section 54F:

In order to claim benefit of tax exemption under section 54F, following conditions must be satisfied:

          •   The benefit of section 54F is available only to an individual or HUF.

          •   The asset transferred should be any long-term capital asset.

          •   Taxpayer must acquire a residential house within a period of one year before or two years after the date of LTCG

OR

  • Should construct a residential house within a period of three years from the date of LTCG.

In case only a part of net sale consideration is invested in house property:

In case if an assessee does not invest full amount of net sale consideration, the exempt LTCG under section 54F shall be determined based on following formula:

Exemption from LTCG= (Capital Gain ) x (Amount Invested) / (Net Sale Consideration)

Cases where exemption from LTCG cannot be claimed under section 54F:

          •  The assessee must not own more than one house property on the date of transfer of a long term asset.

             The assessee cannot purchase a new house property within one year from the date of transfer of long term asset other than one purchased for claiming exemption

             The assessee cannot construction a new house property within three years from the date of transfer of long term asset other than one constructed for claiming exemption u/s 54F

Section 54EC:

Any assessee can claim exemption from LTCG subject to following conditions:

          •   Exemption U/S 54EC can be availed if an assessee invests the amount of Long Term Capital Gain into specific Bonds for a period of 3 years.

          •   The investment in the bonds must be done within six months from the date of LTCG.

              If bonds are redeemed before 3 years in any way, the entire amount would become taxable as LTCG.

             The maximum exemption limit under this section is Rs. 50 Lack only

Exemption from long term capital gain can be availed U/S 54EC in respect of following bonds:

  1. NATIONAL HIGHWAYS AUTHORITY OF INDIA (NHAI) 54EC - CAPITAL GAIN BONDS-SERIES XVIII
  2. REC 54EC CAPITAL GAINS TAX EXEMPTION BONDS - SERIES XI

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