Exemption under section 54 on the sale of a residential house (as set, 1961 Act, AY 2017-18)

Who can claim it

Only an individual or a Hindu undivided family (section 54(1)).

Conditions

1. The asset sold is a long-term capital asset, being a building or land appurtenant to it, which is a residential house whose income is chargeable under the head income from house property (section 54(1)). For assessment year 2017-18 a house is long-term if held for more than 36 months before the transfer (section 2(42A)); the shorter 24-month period for land and buildings applies only from assessment year 2018-19 (its footnote: Act 7 of 2017).
2. The new asset is one residential house in India (section 54(1)), either
   • purchased within one year before or two years after the date of transfer, or
   • constructed within three years after the date of transfer.

The option to buy two houses where the gain does not exceed ₹2 crore was added by Act 7 of 2019 with effect from assessment year 2020-21, so it is not available for assessment year 2017-18.

Amount of the exemption

• If the capital gain is more than the cost of the new house, only the excess is charged to tax (section 54(1)(i)).
• If the new house costs as much as or more than the capital gain, no part of the gain is taxed (section 54(1)(ii)).

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

Capital gains account scheme

The part of the gain not used for the new house before the return is filed must be deposited in an account under the scheme notified by the Central Government, not later than the due date of the return under section 139(1), and the return must carry proof of it. The amount used plus the amount deposited is then treated as the cost of the new house (section 54(2)). If the deposit is not used within the period allowed, the unused part is charged as income of the previous year in which three years from the date of the original transfer end, and may then be withdrawn (section 54(2), proviso).

New house sold within three years

If the new house is sold within three years of its purchase or construction, the exemption is taken back through its cost when that later gain is computed (section 54(1)):

• where the whole gain was exempt, the cost of the new house is reduced by the gain exempted;
• where only part was exempt, its cost is taken as nil.

The gain on that sale is a short-term capital gain.

Example

Ms. Nidhi sells a house in Kanpur in June 2016 at a long-term capital gain of ₹30,00,000 and buys a flat in Indore for ₹22,00,000 in March 2017. Exemption under section 54 = ₹22,00,000 (lower of the gain and the cost); ₹8,00,000 is taxed as long-term capital gain for assessment year 2017-18, unless she deposits it in the capital gains account scheme before the due date of her return and uses it for the same flat within the time allowed.