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March 3, 2021

Exemption under section 54 on capital gains arising from sale of multiple properties invested in one residential house

by Mahesh Mara in Income Tax

Exemption under section 54 on capital gains arising from sale of multiple properties invested in one residential house

Any profit and gain arising from transfer of a capital asset shall be chargeable under the head capital gain in the Previous Year in which the transfer took place. The capital gains arising on transfer of capital assets attract tax under the income tax act. In order to save the tax on capital gains the government has provided some exemptions. Thus in case the assesseee wants to save tax on capital gain then he must do it by availing the exemption provided under the income tax act. In capital gain exemption the assesseee has to purchase the specified asset mentioned in the provision and hold such asset for a particular period. In case the assesseee transfers the assets purchased under the exemption scheme than the assesseee will be liable to pay tax along with interest if he transfers such capital assets. In this article we will discuss about the exemption under 54 and whether exemption under section 54 will be available or not on capital gains arising from sale of multiple properties invested in one residential house.

Eligibility: Section 54 states that where assessee being individual or HUF has sold a long term capital asset consisting of residential house property then he shall be eligible for exemption of capital gain under this provision.

New asset to be purchased: The assessee is required to purchase one residential house property in India in order to avail exemption under section 54. Where the Long term capital gain arising out of transfer is up to Rs. 2 crore then assessee can acquire two residential house properties prescribed time limit. This benefit of two house property is available to the assessee only once in lifetime.

Time limit of purchase of new asset: The assessee has to purchase the new property within 1 year before or 2 years after the date of transfer of the old asset. In case the assessee conducts construction of the property then such construction must be completed within 3 years from the date of transfer of asset.

If the assessee is not able to purchase the property before the due date of filing of return than he can deposit the amount of capital gain in Capital gain account scheme in order to avail the exemption.

Amount of exemption: The assessee will get a maximum exemption of the amount of long term capital gain or the cost of new asset whichever is lower.

Holding period of asset and Consequences of transfer of new asset: The assessee has to hold the asset for 3 years. In case the assessee transfer the new asset within 3 years from the date of purchase or construction, then cost of acquisition of new asset reduced by exempted capital gain.

Where the amount deposited in Capital gain account scheme is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.

Can capital gain arising out of one or more than one house property be invested in a single house property for claiming exemption under section 54:

In case assessee sold two residential flats and purchased one residential flat the assessee can claimed exemption under section 54 in respect of gross amount invested in one residential house against both the property sold. Section 54 makes it clear that exemption is available in respect sale of a residential house and purchase of a residential house. As per section 54, there is no restriction on the number of houses sold, but, there must be a purchase of a corresponding house on which exemption under section 54 could be taken.

It is further noted that there must be a set of sale and purchase of one residential house to claim an exemption under section 54. Therefore, the amount of capital gain in respect of the sale of one property can be treated as exempt against the purchase of one property. However, no exemption can be allowed in respect of other property sold for which there was no corresponding purchase of the residential house. The Delhi ITAT held that the requirement of section 54 is that the capital gain arising from the transfer of residential house should be invested in a residential house.

The requirement is that the investment should be in one residential house. There is no bar on investing the capital gain arising from the sale of more than one residential house in one residential house. Thus, assessee was entitled to exemption under section 54 even if assessee invested capital gains.

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