Vijayarajan & Associates - Capital Gains Exemptions under Income Tax Act – Sections 54, 54F & 54EC

Section 54 – Exemption on Sale of Residential House Property

Purpose:

Section 54 aims to promote homeownership by granting exemption from long-term capital gains tax when the proceeds from selling a residential property are reinvested in another house property in India.

Who Can Claim:

1. Available only to Individuals and HUFs (not applicable to Companies/Firms/LLP/Trusts).

Eligible Asset Sold:

1. A long-term residential house property (held for more than 24 months before transfer).

Reinvestment Requirement:

1. The capital gains must be invested in another residential house in India.

Time Limits for Reinvestment:

Quantum of Exemption:

1. Full exemption if cost of new house ≥ capital gains.
2. Proportional exemption if cost of new house < capital gains.

Key Conditions:

1. The new house must be held for at least 3 years.
2. If sold within 3 years, the exemption claimed becomes taxable.

Important Amendment:

1. From A.Y. 2024-25, exemption is capped at investment of ₹10 crore.

Section 54F – Exemption on Sale of Any Long-Term Capital Asset (Other than House)

Purpose:

Section 54F encourages housing investment even when the original asset is not a residential property. It covers assets like shares, gold, land, bonds, etc.

Who Can Claim:

1. Applicable only to Individuals and HUFs (not applicable to Companies/Firms/LLP/Trusts).

Eligible Asset Sold:

1. Any long-term capital asset except a residential house.
2. (If the asset sold is a residential house, then Section 54 applies instead).

Reinvestment Requirement:

1. The entire net sale consideration must be invested in one residential house in India.

Time Limits:

1. Same as Section 54:
2. Purchase: within 1 year before or 2 years after transfer
3. Construction: within 3 years from transfer

Quantum of Exemption:

1. Exemption is calculated proportionately using:

     Exemption=LTCG×Amount Invested/Net Sale Consideration

Key Conditions:

1. On the date of transfer, the taxpayer must not own more than one house, other than the new one.
2. The taxpayer should not purchase another house within 2 years or construct another within 3 years.
3. The new house must be held for 3 years minimum.

Cap on Investment:

1. From A.Y. 2024-25, maximum exemption allowed = ₹10 crore investment.

Capital Gains Account Scheme (CGAS):

1. If you don’t use the sale proceeds before filing your return (under section 139), you must deposit the unutilised money in a special Capital Gains Account Scheme with a bank (Applicable for Section 54 and 54F).
2. You can later withdraw and use this money to buy/construct the new house.
3. If not used within 3 years, the unused amount becomes taxable in the year the 3 years expire.

Section 54EC – Exemption on Sale of Long-Term Land or Building

Purpose:

Section 54EC provides tax relief on sale of land or building if the capital gains are invested in specified government bonds, promoting infrastructure investment.

Who Can Claim:

1. Available to all taxpayers – Individuals, HUFs, Companies, Firms, etc.

Eligible Asset Sold:

1. Only long-term land or building (or both).

Reinvestment Requirement:

1. Capital gains must be invested in specified bonds issued by:
2. National Highways Authority of India (NHAI)
3. Rural Electrification Corporation (REC)
4. Other government-notified institutions

Time Limit:

1. Investment must be made within 6 months of transfer.

You can spread investment across 2 financial years (if within 6 months), but total still cannot exceed ₹50 lakhs.

Quantum of Exemption:

1. Exemption = Amount invested in specified bonds
2. Subject to ₹50 lakh maximum per financial year

Key Conditions:

1. Bonds have a lock-in of 5 years.
2. If you sell or even take a loan against these bonds before 5 years, the earlier exempted capital gain becomes taxable in that year.

Comparison of Section 54, Section 54F & Section 54EC