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November 11, 2020

Can an individual sell two house properties and buy one to claim tax exemption u/s 54?

by CA Shivam Jaiswal in Income Tax

Can an individual sell two house properties and buy one to claim tax exemption u/s 54?

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. 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).

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3 years from the date of its acquisition/completion of construction, then the benefit granted under section 54 will be withdrawn.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.

Can a person sell 2 house properties and buy one to claim exemption under Section 54?

  • Income Tax allows exemption on the long-term capital gain if you invest in a new residential property subject to certain conditions.
  • With effect from Assessment Year 2020-21, the Finance Act, 2019 was amended Section 54 to extend the benefit of exemption in respect of investment made in two residential house properties.
  • The exemption for investment made, by way of purchase or construction, in two residential house properties shall be available if the amount of long­ term capital gains does not exceed Rs. 2 crores.
  • If assessee exercises this option, he shall not be entitled to exercise this option again for the same or any other assessment year.

For instance, Mr A sold his residential house on 2nd January, 2021 for Rs. 10 crores which was purchased by him 10 year ago for Rs. 8 crores. Mr. A bought a new residential house on February 01, 2020 and on March 01, 2021 worth Rs. 1 crore each.

Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. With effect from Assessment Year 2020-21, a taxpayer has an option to make investment in two residential house properties in India to claim section 54 exemption. This option can be exercised by the taxpayer only once in his lifetime provided the amount of long-term capital gain does not exceed Rs. 2 crores.

The option to claim capital gain exemption under Section 54, in respect of two houses, shall be available as the amount of capital gains does not exceed Rs. 2 crores.

As the original residential house is transferred on 2nd January, 2021, the new house should be purchased within one year before and two years after the date of transfer. In other words, the new asset purchased between 3rd January, 2020 and 1st January, 2023 shall be eligible for exemption under Section 54.

As the first house is purchased on 1st February, 2020, within 1 year before the date of transfer of original asset, and second house is purchased on March 01, 2021, within 2 years after the date of sale of original residential house, investment in both the new houses are eligible for section 54 exemption.

Amount of exemption

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].

In simple words, now one can claim exemption under Section 54 by making investments in 2 residential house properties in India.

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