Dear Friends,

In this post I am trying to cover all the issue related to saving of tax under section 54 of Income tax act-1961 ,if any issue left of you have a different opinion than our you may please record in comment section.

As per section 54 capital gain arising from the sale of the long term residential property can be saved if we buy or construct a residential house property for long term form the capital gain amount.

Important points in this regard are given below

  1. Section benefit can be availed only by Individual and HuF assessee
  2. Sale should be of long term residential building or lands appurtenant thereto
  3. Income of house property should be chargeable under the head of "income from house property"
  4. Capital gain arising from sale of above said property will be saved up to the amount used in to
    1. purchase a residential house within year before the date of transfer of old house or within two year after the date of transfer of old house.or
    2. construct a house with in three year from date of transfer of old house property.
  5. Capital gain is saved up to the amount which is used in to buy /construct new house,if amount used for house purchased/construction is less than the amount of capital gain than the balance amount will be taxed as long term capital gain.
  6. If the new house will be sold within three year from the date of purchase or construction as the case may be than while calculating capital gain of the cost of new house will considered as under.
    • If cost of new house is less than the capital gain arising from old house:cost of new house will be nil.
    • if the cost of new house is more than the capital gain arising from old house :cost of new house will be :total cost of purchase/construction minus capital gain on sale of old asset .
  7. If amount of capital gain arising from the sale of old asset is not used as per point 4 before the due date of furnishing of income tax return or furnishing of return which ever is earlier than the balance unused amount should be deposited in designated banks under capital gain account scheme 1988 .
  8. if capital gain amount unused has not been deposited under the scheme as per sr no 7 than the amount of capital gain will be taxable in the previous year as long term capital gain it self no matter it is actually used by the assessee for the purpose of sr no 4
  9. if the amount deposited in capital gain scheme as per sr no 7 wholly or partly has not been used with in the three year from the date of transfer of old asset and purpose given under sr no 4 than the unused amount will be taxable in the hand of the assessee in the previous year in which three years expires from date of transfer of old asset as long term capital gain.
points emerged from court cases.

  1. Exemption is allowable in full even if house is partly purchased and partly constructed - The main purpose of the statute is to give relief for the acquisition of a new residential house. In that context, it does not really matter whether the new residen­tial house is partly constructed or partly purchased - B.B. Sarkar v. CIT [1981] 132 ITR 150 (Cal.).
  2. When more than one house is purchased - In case the assessee has purchased more than one house/flat within the period prescribed in section 54, it is for the assessee to claim relief against the purchase of any one of the house/flat provided the other condi­tions mentioned in the section are satisfied - K.C. Kaushik v. P.B. Rane, ITO [1990] 84 CTR (Bom.) 62. (Exemption is not available on more than one house wef Ay 2015-16-Change in Budget 2014)
  3. Exemption is allowable even if a share in new property is pur­chased - When the Act enables an assessee to get exemption from payment of tax in respect of purchase or construction of a residential house, purchase or construction of a portion of the house should also enable the assessee to claim the exemption. It is possible that a person may not be in a position to purchase the whole residential house at a time and in the circumstances an assessee might purchase a portion of the house or some interest in the house. Thus, where the assessee sold a house and from the sale proceeds purchased 15 per cent undivided share in a house, proper­ty from her husband and her son, and she was earlier residing in that house exemption under section 54 can be allowed - CIT v. Chandanben Maganlal [2000] 245 ITR 182 (Guj.)
  4. Exemption on capital gains could not be refused to the assessee simply on the ground that the construction of the new house had begun before the sale of the old house - CIT v. H.K. Kapoor [1998] 150 CTR (All.) 128
  5. u The date of commencement of the construction of the new house is not material. To get the benefit of section 54, the assessee must have constructed the new house within the prescribed period from the date of sale of the old house - CIT v. J.R. Subramanya Bhat [1987] 165 ITR 571 (Kar.).
  6. Purchase need not necessarily be on ‘cash and carry’ basis - The word ‘purchase’ in section 54 must be interpreted in its ordinary meaning, as buying for a price or equivalent of price by payment in kind or adjustment towards an old debt or for other monetary consideration. There is no stress in the section on ‘cash and carry’. Thus, where the eldest brother in a coparcenary compris­ing four brothers sold his own house and acquired the common house from his three brothers who executed release deeds for a consideration, there was a ‘purchase’ by the eldest brother of the share of each of the brothers for a price - CIT v. T.N. Aravinda Reddy [1979] 120 ITR 46 (SC).
  7. New House must be situated in India: In Budget 2014 amendment has been made in section 54 and now new house can only be purchased in India wef ay 2015-16


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