As per section 54 of the Income Tax Act seller of a residential property gets relief from capital gains tax whenever he sells his properties and proceeds to buy the new property. In major cases the property owners purchase their properties to purchase new properties due to several reasons which are like job transfers, retirement etc.. In all these cases the main aim of the property owners is not to get gains. So whenever a taxpayer sells his residential property and buys new property then he will be exempted from capital gains under Section 54 of the Income Tax Act. Here we know about Sec 54 of Income Tax Act with Example.
Eligibility under Sec 54 of the Income Tax Act with Example:
The following conditions must be satisfied by the taxpayer to claim benefits under Section 54 of the Income Tax Act:
- The taxpayer is an individual or HUF. The exemption under Section 54 is not available for companies or LLPs.
- The asset transferred should be a long-term capital asset, being a residential house property.
- Within a period of one year or two years the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house. In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).
- A taxpayer can claim benefit under Section 54 of the Income Tax Act for one residential house property purchased or constructed in India only. If a taxpayer is involved in more than 1 such transaction during his/her lifetime, the benefit will be available for one of the transaction only. Finally, a taxpayer cannot sell a home in India and buy a home abroad, while claiming benefit under Section 54. The home purchased or constructed must be in India only.
Example-1: If the Capital Gains is 6 lakhs and the cost of the new house is 8 lakhs, then the entire capital gains of 6 lakhs is exempt.
Example -2: If the capital gains are 6 lakhs and the cost of a new house is 4 lakhs, then capital gains is exempt only up to 4 lakhs Balance 2 lakhs is taxable.