Exemption of capital gain on sale of residential house ( Section 54) Ammended By CA Sayan Ghosh

Section 54 provides that long-term capital gain arising from transfer of a residential house is exempt from income tax, if the amount of such capital gain is utilised to acquire or constructed residential house in India within specified period subject to other conditions.

Finance Act 2019 has inserted two proviso in sub-section (1) to provide relief to the assessee having long term capital gain up to Rs. 2 cr., arising from transfer of a residential house, if the amount of capital gain is utilised for purchase or construction of two residential houses in India instead of one residential house which is otherwise permissible. It is one time opportunity. It is also optional.

This amendment will take effect from 01-04-2020.

Essential conditions for claiming relief
  • Assessee is an Individual or HUF.
  • Residential house is transferred after 01-04-2019.
  • Capital Gain should result from transfer of long term capital asset being a residential house.
  • Amount of capital gains should not be more than Rs. 2 crores.
  • Assessee must have either purchased one/two residential house (s) within a period of one year before or two years after the date of transfer or constructed one/ two residential house (s) within a period of three years from the date of transfer.
  • New residential house must be in India.
  • If the amount of capital gain is not utilised for purchase or construction of before due date of furnishing of income tax return u/s 139(1), it shall be deposited in capital gain account scheme.
  • The provision is optional, if the option is exercised, the assessee will not be able to exercise the option again in the same or any other assessment year.
The exemption of capital gain is restricted to the amount of such gains utilised in purchase or construction of new residential house.

If capital gain is more than the amount utilised , then the balance amount of capital gain is taxable.
If the capital gain is less than the amount utilised, then entire capital gain is exempt.

If new house is transferred within 3 Years

If the assessee transfers any of the two house purchased or constructed by availing benefit under first proviso to section 54(1) within three years, the cost of such house to be reduced by the amount of capital gains in respect of which exemption was claimed.

In amended provision of section 54, it is not clear how to assign or allocate the amount of capital gain to two housrs, possibly entire capital gain may be considered as invested in first house and balance in second house, or one may considered it proportionately as per there own understanding or having regard to the transaction of construction or acquisition of new houses.

If assessee transfers any of the two housed within the period of three years, the amount of capital gain assigned or allocated to such house earlier while claiming exemption u/s 54 may be considered as capital gain taxable in the year of transfer of such new house along with sale consideration of such house.

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