Exemption under section 54 for the capital gain on a residential house (as set, 1961 Act, AY 2019-20)

Section 54 exempts the capital gain on the sale of a residential house to the extent the gain is put into another residential house.

Who and what qualifies

1. Only an individual or a Hindu undivided family.
2. The asset transferred (the original asset) must be a long-term capital asset, a building or land appurtenant to it, that is a residential house whose income is chargeable under the head Income from house property (a house let or self-occupied qualifies; a house used for the owner's business does not).

The new house and the time limits

• The assessee must buy one residential house in India within one year before or two years after the date of transfer, or build one within three years after that date (section 54(1)).
• The new house must be in India; a house abroad does not qualify.
• For assessment year 2019-20 the exemption is for one new house. The proviso allowing two houses, where the gain does not exceed ₹2 crore, applies only from 1 April 2020 (its footnote in the held text).

Amount of the exemption

• If the new house costs as much as the gain or more, the whole gain is exempt (section 54(1)(ii)).
• If the gain is more than the cost of the new house, the gain up to that cost is exempt and the excess is charged under section 45 as income of the previous year of the transfer (section 54(1)(i)).

Unlike section 54F, which measures the investment against the net consideration (the full value of the consideration less the expenditure on the transfer), section 54 needs only the capital gain to be invested.

Capital gains account scheme

Gain not used for the new house before the return is filed must be deposited before the return is furnished, and in any case no later than the due date of the return under section 139(1), in an account with a bank or institution specified in the capital gains account scheme the Central Government has notified, and is used as that scheme lays down. The amount used before then plus the amount deposited is treated as the cost of the new house, and the return must be accompanied by proof of the deposit (section 54(2)). If the deposit is not used within the period allowed, the unused part is charged as capital gain of the previous year in which three years from the date of the original transfer expire, and the assessee may then withdraw it (proviso to section 54(2)).

Sale of the new house within three years

If the new house is transferred within three years of its purchase or construction, its cost is reduced by the capital gain exempted (or taken as nil if the whole cost was used up by the exemption) in computing the gain on that sale (section 54(1)(i) and (ii)). The exemption given earlier is in this way taken back through the lower cost.

Example (our own figures)

Ms. Anjali sells her flat in Jaipur, held for ten years, in August 2018 and has a long-term capital gain of ₹25,00,000. She buys a house in Udaipur for ₹18,00,000 in March 2019. Exempt: ₹18,00,000; chargeable: ₹7,00,000. If she sells the Udaipur house in 2020 for ₹20,00,000, its cost is taken as nil and the whole ₹20,00,000 is the gain on that sale.