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October 6, 2020

How to Save Capital Gain Tax on Sale of Resident House, Land and Capital Assets?

by CA Shivam Jaiswal in Income Tax

How to Save Capital Gain Tax on Sale of Resident House, Land and Capital Assets?

Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price.

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54F etc. Let us learn in detail about these exemptions in this article.

Section 54

Section 54 gives relief from capital gains tax to a taxpayer who sells his residential house and from the sale proceeds he acquires another residential house. Following conditions should be satisfied to claim the benefit of section 54:

  • 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.
  • Within 1 year before or 2 years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within 3 years from the date of transfer of the old house.
  • In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).
  • With effect from Assessment Year 2020-21, the Finance Act, 2019 has amended Section 54 to extend the benefit of exemption in respect of investment made in two residential house properties.

Exemption under section 54 will be lower of following:

  • Amount of capital gains arising on transfer of residential house; or
  • Amount invested in purchase/construction of new residential house property [including the amount deposited in Capital Gains Deposit Account Scheme].

Consequences if the new house is transferred

If a taxpayer purchases/constructs a house and claims exemption under section 54 and then transfers the new house within 3 years from the date of its acquisition/completion of construction, then the benefit granted under section 54 will be withdrawn.

If the new house is sold before 3 years from the date of its purchase/completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new house.

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Section 54B

Section 54B gives relief to a taxpayer who sells his agricultural land and from the sale proceeds he acquires another agricultural land.

Following conditions should be satisfied to claim the benefit of section 54B.

  • The benefit of section 54B is available only to an individual or a HUF
  • The asset transferred should be agricultural land. The land may be a long-term capital asset or short-term capital asset.
  • The agricultural land should be used by the individual or his parents for agricultural purpose for at least 2 years immediately preceding the date of transfer.
  • In case of HUF the land should be used by any member of HUF.
  • Within 2 years from the date of transfer of old land the taxpayer should acquire another agricultural land.
  • In case of compulsory acquisition, the period of acquisition of new agricultural land will be determined from the date of receipt of compensation.
  • However, as per section 10(37), no capital gain would be chargeable to tax in case of an individual or HUF if agricultural land is compulsorily acquired under any law and the consideration of which is approved by the Central Government or RBI and received on or after 01-04-2004

Exemption under section 54B will be lower of the following:

  • Amount of capital gains arising on transfer of agricultural land; or
  • Investment in new agricultural land [including the amount deposited in Capital Gains Deposit Account Scheme

Consequences if the new land is transferred

  • If a taxpayer purchases new agricultural land to claim exemption under section 54B and subsequently he transfers the new agricultural land within 3 years from the date of its acquisition, then the benefit granted under section 54B will be withdrawn.
  • If the agricultural land is sold within 3 years from the date of its purchase, then at the time of computation of capital gain arising on transfer of the new land, the amount of capital gain claimed as exemption under section 54B will be deducted from the cost of acquisition of the new agricultural land.

Section 54D

Section 54D provides exemption from capital gain on compulsory acquisition of land or buildings forming part of industrial undertaking.

To claim exemption under section 54D, the assessee is required to satisfy the following conditions:

  • Exemption under section 54D is available to any category of person on compulsory acquisition of land or buildings (which is forming part of industrial undertaking).
  • Exemption under section 54D is available to both the Long-Term Capital Asset and Short Term Capital Asset.
  • It is mandatory that the transferred asset should have been used for the industrial purpose for at least two years before the date of acquisition.
  • The transferor is required to invest the amount in purchasing any other land or building for the purpose of shifting or re-establishing the industrial units. The said amount needs to be invested within 3 years from the date of receipt of the compensation.

Exemption under section 54D will be lower of the following:

  • Capital gain on compulsory acquisition of land or building; or
  • Amount of investment in acquiring new land or building.

Withdrawal of exemption claimed under section 54D

  • Once the exemption is claimed under section 54D, the assessee is mandatorily required to hold the newly acquired land or building for 3 years from the date of acquisition.
  • In case the newly acquired land or building is transferred before the expiry of 3 years. Then, at the time of calculating the capital gain of newly acquired land or building, the cost of acquisition would be reduced by the amount of capital gain exempted under section 54D.

Section 54EC

Exemption under section 54EC of the Income Tax Act is available on Capital Gains on sale of any long-term capital asset being land or building or both and invested in NHAI or REC Bonds.

A taxpayer can claim exemption u/s 54EC if all the below conditions are satisfied:

  • Any assessee can claim exemption u/s 54EC. Therefore, an Individual, HUF, Company, LLP, Firm, etc can claim this exemption.
  • The asset sold is a Long-Term Capital Asset (LTCA) being Land or Building or Both. The asset is long Term if it has been held for more than 24 months.
  • Capital Gains are invested within 6 months from the date of transfer.
  • Investment can be made in the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), or Any Other Bonds notified by the Central Government.
  • The investment amount cannot be more than Rs. 50 lakhs during the current and succeeding financial year.

The Amount of Exemption under Section 54EC will be least of the following:

  • The Cost of NHAI/REC Bonds
  • The Capital Gains on the sale of land or building.

Withdrawal of exemption claimed under section 54EC

When bonds are sold within 5 years from the date of purchase, then the exemption u/s 54EC is withdrawn. The amount of exemption availed will be reduced from the cost of the asset. Capital Gains will be the total sales value minus the cost of the asset.

Section 54EE

In case there is a long-term capital gain, and the assessee invests the amount into a long term specified asset, then, such assessee would be eligible to avail exemption under section 54EE.

In order to avail exemption under section 54EE, the assessee must satisfy the following conditions:

  • The assessee should have earned a capital gain on account of transfer of a long-term capital asset.
  • The assessee has invested (whole or part) of the capital gain in the long term specified asset. The long term specified asset here means units of funds, as notified by the Government, issued before 1st April 2019.
  • The investment into a long term specified asset is to be made within 6 months from the date of transfer.
  • The total investment made in the long term specified asset (from capital gain arising on transfer of one or more long term capital asset) does not exceed Rs 50 Lakhs during the financial year in which the long-term capital asset is transferred and also in the subsequent financial year.

Amount of exemption available under section 54EE of Income Tax Act shall be lower of

  • Amount of capital gain invested into long term specified asset; or
  • Rs 50 Lakhs

Withdrawal of exemption claimed under section 54EE

In case the assessee transfers or converts the long term specified asset before the lock-in period of three years. Then, the exemption claimed under section 54EE would be deemed to be income chargeable under the head ‘Capital Gain’ in the previous year in which transfer/ conversion has taken place.

Section 54F

Section 54Fprovides exemption towards long term capital gain (other than a residential house) when the amount is invested in purchasing or constructing a new residential house property. 

The assessee needs to satisfy the following conditions in order to avail exemption under section 54F:

  • An exemption under section 54F is available only to an individual or a HUF.
  • An exemption is available towards the capital gain arisen on the transfer of any long-term capital asset other than a residential house.
  • The ‘net consideration’ arisen on the transfer of long-term capital asset is invested in either of the following manners –
    1. The amount is invested to purchase one residential house in India. It is compulsory that such investment is made within 1 year before or 2 years after the date of transfer; or
    2. The amount is invested, within 3 years, to construct one residential house in India.

The exemption under section 54F is not available under the following circumstances:

  • The assessee already owns more than one residential house on the date of transfer of the long-term capital assets.
  • The assessee purchases additional residential house (other than the new residential house purchased/ constructed to claim an exemption under section 54F is claimed) within 1 year from the date of transfer of the long-term capital asset.
  • The assessee constructs additional residential house (other than the new residential house purchased/ constructed to claim an exemption under section 54F is claimed) within 3 years from the date of transfer of the long-term capital asset.

In the above 3 situations, the amount of capital gains arising from the transfer of the original asset, which was not charged to tax, will be deemed to be the income by way of long term capital gains of the year in which new house is transferred or another residential house (other than the new house) whose income is taxable under the head ” Income From House Property” is purchased or constructed, as the case may be.

Amount of exemption available under section 54F shall be as follows:

  • When full net consideration is invested – The full amount of long-term capital gain is exempt
  • When proportionate net consideration is invested – Exemption = Long term capital gain * Amount re-invested / Net consideration

Withdrawal of Exemption under Section 54F

  • The assessee cannot transfer the newly purchased or constructed residential house for 3 years from the date of purchase or date of construction, as the case may be.
  • However, in case the assessee transfers the newly purchased/ constructed residential house, then, the capital gain exempted under section 54F would be taxable as long-term capital gain in the previous year in which the residential house is transferred.

Section 54G

Section 54G of the Income Tax Act provides exemption towards capital gain which arises on the transfer of capital assets on account of shifting of industrial undertaking from the urban area to a rural area.

The assessee needs to satisfy the following conditions to avail exemption under section 54G:

  • Section 54G exempts capital gain arisen on account of transfer of plant or machinery or building or land or any rights in land or building which is being used for the business purpose of an industrial undertaking situated in an urban area.
  • Exemption under section 54G is available to both short term capital gain and long-term capital gain to all categories of persons.
  • The claimant is required to re-invest the amount in shifting of the industrial undertaking from the urban area to a rural area. The re-investment is to be made within a period of 1 year before or 3 years after the date of transfer for the purpose specified below –
  • For purchasing of new plant or machinery for the business purpose of industrial undertaking shifted in a rural area.
  • For purchasing land or building or constructing a building for the business purpose of industrial undertaking shifted in a rural area.
  • Expenditure incurred towards shifting of the old industrial undertaking and establishing the same in the rural area.
  • Incurring any other expenditure as specified by the Government.

Amount of exemption available under section 54G of the Income Tax Act shall be lower of:

  • An amount invested into land and building and plant and machinery for shifting of industrial undertaking in a rural area; or
  • The amount of capital gain

Withdrawal of Exemption of Section 54G

Section 54G restricts the assessee from transferring the newly acquired asset for a period of three years. However, in case the assessee transfers the assets before the expiry of a period of three years, then, the exemption allowed under section 54G would be withdrawn.

In case of transfer and withdrawal of exemption, at the time of calculating the capital gain of newly transferred assets, the cost of acquisition of the newly transferred asset shall be reduced by the amount of exemption claimed under section 54G of the Income Tax Act.

Section 54G of the Income Tax Act provides exemption towards capital gain which arises on the transfer of capital assets on account of shifting of industrial undertaking from the urban area to a Special Economic Zone (SEZ).

Section 54GA

The assessee needs to satisfy the following conditions to avail exemption under section 54GA:

  • Section 54GA exempts capital gain arisen on account of transfer of plant or machinery or building or land or any rights in land or building which is being used for the business purpose of an industrial undertaking situated in an urban area.
  • Exemption under section 54GA is available to both short term capital gain and long-term capital gain to all categories of persons.
  • The claimant is required to re-invest the amount in shifting of the industrial undertaking from the urban area to a SEZ. The re-investment is to be made within a period of 1 year before or 3 years after the date of transfer for the purpose specified below –
    1. For purchasing of new plant or machinery for the business purpose of industrial undertaking shifted in a SEZ.
    2. For purchasing land or building or constructing a building for the business purpose of industrial undertaking shifted in a SEZ.
    3. Expenditure incurred towards shifting of the old industrial undertaking and establishing the same in the SEZ.
    4. Incurring any other expenditure as specified by the Government.

Amount of exemption available under section 54GA of the Income Tax Act shall be lower of:

  • An amount invested into land and building and plant and machinery for shifting of industrial undertaking in a SEZ; or
  • The amount of capital gain

Withdrawal of Exemption of Section 54GA

Section 54G restricts the assessee from transferring the newly acquired asset for a period of 3 years. However, in case the assessee transfers the assets before the expiry of 3 years, then, the exemption allowed under section 54GA would be withdrawn.

In case of transfer and withdrawal of exemption, at the time of calculating the capital gain of newly transferred assets, the cost of acquisition of the newly transferred asset shall be reduced by the amount of exemption claimed under section 54GA.

Section 54GB

Section 54GB exempts the capital gain arising from transfer of a long-term capital assets being a ‘residential property’, if the amount is invested in subscription of the equity shares of the eligible company.

The assessee needs to satisfy the following conditions to avail exemption under section 54GB:

  • The capital gain should arise on transfer of a long-term capital asset. The long-term capital asset should be a residential property (being a house or a plot of land)
  • Only individual or a HUF are eligible for exemption under section 54GB.
  • The claimant is required to utilize the net consideration before the due date of furnishing the income tax return. The said net consideration is to be utilized for subscription in the equity shares of an eligible company.
  • The company should utilize the amount for purchasing the new asset. The amount should be utilized within a period of one year from the date of subscription.

Amount of exemption available under section 54GB shall be as follows:

  • Amount of net consideration is equal to or less than the cost of new asset: Entire capital gain would be exempt
  • Amount of net consideration is greater than the cost of new asset: Proportionate capital gain to be exempt = (investment in new asset * capital gain)/ net consideration.

Withdrawal of Exemption of Section 54GB

  • The equity shares of the company and the new assets acquired by the company cannot be transferred for 5 years from the date of acquisition.
  • In case of transfer, the exemption allowed under section 54GB would be withdrawn.
  • The amount of exemption claimed under section 54GB would be taxable in the previous year in which the equity shares of the company or the new assets.

Capital Gain Deposit Account Scheme

Capital Gains Account Scheme was introduced in 1988 by the Central Government. The time limit available to the depositor for re-investment and availing exemption of capitals gains, in many cases is longer than the due date to file the return of income. In such cases, the taxpayer is given an option of depositing such underutilised capital gains in ‘Capital Gains Account’ introduced under Capital Gains Account Scheme. Any capital gain invested in Capital Gains Account Scheme will be eligible for capital gain exemption as it would in case of re-investment.

Who can deposit in Capital Gains Account Scheme?

Category of taxpayer with capital gains who are eligible to invest in CGAS from Section 54 to 54F of the Income-tax Act, 1961 is provided below:

  • 54 – Sale of residential house
  • 54B – Sale of land used for agricultural purpose
  • 54D – Compulsory acquisition of land and building
  • 54E – Sale of any long-term capital asset
  • 54EC – Sale of long-term capital asset being land or building or both
  • 54F – Sale of any long-term capital asset not being residential property
  • 54G – Transfer of asset (machinery, plant or building, land or right in land or building) in case of shifting of industrial undertaking from urban area
  • 54GA – Transfer of asset/s (machinery, plant or building, land or right in land or building) in case of shifting of industrial undertaking from urban area to Special Economic Zone
  • 54GB – Transfer of residential property

Summary of Exemptions provided under Capital Gains

SecApplicable toAsset SoldInvestment to be made inTime limit of InvestmentExemptionLock in period
54Individual or HUFResidential houseResidential housePurchase within 1 year before or 2 years after the date of transfer Or construct within 3 years from the date of transferLower of: capital gains or amount invested in purchase or construction3 years
54BIndividual or HUFagricultural landagricultural landPurchase within 2 years from the date of transferLower of: capital gains or amount invested in purchase3 years
54DAny assesseeLand or building forming part of an industrial undertakingLand or building for shifting or re-establishing the industrial undertakingPurchase within 3 years from the date of transferLower of: capital gains or amount invested in purchase3 years               
54ECAny assesseeLand or buildingNHAI bonds or REC bondsPurchase within 6 months from the date of transferLower of: capital gains or amount invested NHAI/REC bonds5 years
54EEAny assesseeLong term capital assetUnits notified by Central GovernmentPurchase within 6 months from the date of transferLower of: capital gains or amount invested NHAI/REC bonds3 years
54FIndividual or HUFLong term capital asset other than residential houseResidential house propertyPurchase within 1 year before or 2 years after the date of transfer Or construct within 3 years from the date of transferWhen full net consideration is invested; full amount of long-term capital gain is exempt When proportionate net consideration is invested – Exemption = Long term capital gain * Amount re-invested / Net consideration3 years
54GAny assesseeCapital asset used in an industrial undertaking in an urban areaIndustrial undertaking in rural areaPurchase within 1 year before and 3 years after the date of transferLower of: amount invested or capital gains3 years
54GAAny assesseeCapital asset used in an industrial undertaking in an urban areaIndustrial undertaking in SEZPurchase within 1 year before and 3 years after the date of transferLower of: amount invested or capital gains3 years
54GBIndividual or HUFResidential PropertyEquity shares in an eligible companyBy return filing due dateIf net consideration =< the cost of new asset, then entire capital gain would be exempt   If net consideration > the cost of new asset, then capital gain to be exempt = (investment in new asset * capital gain)/ net consideration5 years

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