Tax benefit under section 54 of the Income Tax Act

An assessee can claim exemption from capital gains on sale of house property according to the sections 54, 54B, 54D, 54EC, 54F and 54G of the Income Tax ACT, 1961 subject to some conditions.

Long Term Capital Gain arising out of the transfer of a Residential House (Section 54):

The exemption under the Section 54 can be availed only by an individual or a HUF who transfers a residential house or a residential property which results in a long-term capital gain, and then invests the said amount in acquiring a new residential house or a residential property.

This exemption can be availed only subject to fulfillment of the following essentials:
(a) The transferor is an individual or a Hindu Undivided Family;
(ii) The asset is a long-term capital asset, whether land or building being a residential house;
(iii) The income from such property is assessable under the head “Income from House Property”;
(iv) The transferor purchases a residential house ia period of three years from the date of the transfer of the old house;
(v) The new house property has not been transferred within three years from the date of its purchase or construction.

Amount of Exemption available:

The amount of exemption that can be availed under section 54 is equal to the amount of the capital gain if cost of the new property is more than the capital gain received or equal to the cost of the new one if the cost is less than the capital gain received.

Deposit Scheme:

When the amount of capital gain is not used for the purchase or construction of a new residential house before the due date of filing of the income tax return, it shall be deposited in an account in a public sector bank according to the Capital Gain Account Scheme, 1988.

The amount which has been used in the new house and the amount deposited shall be considered to be the amount used for the purchase of new residential house under section 54.

If the amount deposited is not used for the purchase or construction of a new house within the due period, then the amount shall be considered as long term capital gain in the previous year in which the stipulated period expires. In such a case, the assessee can withdraw the amount from the bank.

Consequences of transferring the new house before three years:

If the new house property is transferred within a period of three years from the date of the purchase or construction, the amount of capital gains arising there from and the amount of gains exempted earlier, will be chargeable to income tax in the year of sale of the house property.
The amount of exemption shall be deducted from the cost of acquisition of the new house at the time of calculating short-term capital gains on the transfer of the new asset.

Judicial precedents:

The Hon’ble Karnataka High Court in the case of D. Anand Basappa vs. ITO, 309 ITR 329 (Kar.) (2009) has held that for two adjacent residential units which are used as a single residential house, exemption can be allowed.

The Hon’ble Delhi High Court in the case of Prem Prakash Bhutani vs. CIT, 110 TTJ (Del) 440 (2007) has held that the existence of a residential house consisting of many independent units cannot be a bar for allowance of exemption.

The Hon’ble Mumbai High Court in the case of ACIT vs. Mrs. Leela P. Nanda, 286 ITR (AT) 113 (Mum) (2006) also held that exemption can be allowed where two adjoining flats are converted into a single residence.

The ITAT, Mumbai in the case of ITO vs. Mrs. Sushila M. Jhaveri, 107 ITD 327 (SB) (2007) also held that exemption under section 54 is allowable for adjacent flats.
The Hon’ble Karnataka High Court in the case of DIT vs. Mrs. Jennifer Bhide, 15 taxmann.com 82 (Kar.) [2011] has held that only as the sale deed is in joint name, the assessee cannot be denied exemption under section 54.

Capital Gain arising out of transfer of Agricultural Land (Section 54B):

Capital gains arising on the transfer of land used by a person or his family members for agricultural purposes for two years immediately before the date of transfer are exempt from income tax if the assessee has purchased another agricultural land within two years from the date of such transfer subject to some conditions.

Capital Gain arising out of Compulsory Acquisition of property of an Industrial Undertaking (Section 54D):

Capital gains arising on the compulsory acquisition of any property being a part of an industrial undertaking is exempt from income tax subject to the following conditions:
1. Such property was used by the assessee for an industrial undertaking for two years before the date of acquisition;
2. The assessee has purchased or constructed a building within a period of three years from the date of the receipt of the compensation; and
3. The newly acquired property is used for shifting or establishing the said industrial undertaking or setting up another one.

Exemption for investment in Bonds (Section 54EC):

This exemption is can be availed by an individual, HUF, company , etc. who invests the amount received as long term capital gain within a period of six months of a the transfer of the capital asset, in any of the bonds specified in the Income Tax Act.

Long Term Capital Gain arising out of transfer of a Capital Asset except a Residential House Property (Section 54F):

This kind of exemption is available to an individual or a HUF who transfers a capital asset resulting in a long-term capital gain and invests the amount in acquiring a new residential house.

This exemption can be availed if the following two conditions are fulfilled:
(1) The transferor purchases or constructs a residential house in India within one year before or two years after the date of transfer or construction, a residential house; and
(2) The new property is not transferred within three years from the date of purchase or construction.

Capital Gain arising out of transfer of a Capital asset in connection with shifting of an industrial undertaking from Urban Area (Section 54G):

This exemption is available to individuals, HUFs, companies or any other persons who transfers the assets which are plants, machinery, lands, etc. or any right in a property which is being used for an industrial undertaking situated in an urban area to any other area. The assessee should purchase within one year before or after three years of the date of transfer.