Exemption under section 54 on the transfer of a residential house (as set, 1961 Act, AY 2018-19)

Who may claim it

Only an individual or a Hindu undivided family (section 54(1)). A firm or a company cannot claim it.

Conditions

1. The asset transferred (the original asset) is a long-term capital asset that is a building, or land appurtenant to it, used as a residential house whose income is chargeable under the head Income from house property. For assessment year 2018-19 a house is long-term once it has been held for more than 24 months: the third proviso to section 2(42A) applies 24 months to land or buildings from 1 April 2018 (its footnote), against 36 months before.
2. The assessee buys one residential house in India within one year before or two years after the date of transfer, or constructs one within three years after that date (section 54(1)).
3. The option of buying or building two houses where the gain does not exceed ₹2 crore was inserted only with effect from 1 April 2020 (the footnote to the proviso to section 54(1)), so it is not available for this year.

Amount of the exemption

• Where the new house costs as much as the gain, or more, no part of the gain is taxed (section 54(1)(ii)).
• Where the gain is larger than what the new house costs, only that cost is exempt and the rest of the gain is charged under section 45 in the year of transfer (section 54(1)(i)).

So the exemption is the lower of the long-term capital gain and the cost of the new house.

Capital gains account scheme

Any part of the gain not used to buy or build the new house before the date of furnishing the return must be deposited before the return is furnished, and in any case not later than the due date of the return under section 139(1), in an account with a bank or institution specified in the scheme the Central Government has framed by notification (the Capital Gains Accounts Scheme); the money is to be used in accordance with that scheme, and the return must be accompanied by proof of the deposit. The amount already used and the amount deposited are together treated as the cost of the new house (section 54(2)). If the deposit is not used within the time allowed, the unused part is charged under section 45 as income of the previous year in which three years from the transfer of the original house end, and the assessee may then withdraw it under the scheme (proviso to section 54(2), clauses (i) and (ii)).

Withdrawal of the exemption

If the new house is transferred within three years of its purchase or construction, the exemption is taken back through the cost: where the whole gain was exempt, the cost of the new house is reduced by the exempt gain; where only part was exempt, its cost is taken as nil (section 54(1)(i) and (ii)). The gain on that sale is short-term if the new house was held for not more than 24 months (third proviso to section 2(42A)); held for longer, it is long-term, though the reduced or nil cost still applies.

Example (our own figures)

Mr. X sells a house in June 2017 with a long-term capital gain of ₹40,00,000 and buys a new house for ₹30,00,000 in March 2018. Exemption ₹30,00,000; taxable long-term capital gain ₹10,00,000. Had he deposited a further ₹10,00,000 in the scheme before furnishing his return, and not later than its due date, with proof of the deposit attached to the return, the whole gain would have been exempt.