Section 54 of the Income Tax Act

Under Section 54 of the Income Tax Act, a person or Hindu Undivided Family vending a residential house property can seek an exemption from such capital gains. If the taxpayer supports the proceeds in investment, i.e., purchase of another residential house property. For expropriating this tax advantage, specifically defined circumstances must be satisfied.

What is the provision under Section 54 of the Income Tax Act?

A residential house sale can be considered a sale of a capital asset, and the profit earned from such a sale is taxable as a capital gain. The taxability is only on the profit earned by the individual from the sale of the property

What is a capital asset?

A capital asset is defined under section 2(14) of the Income Tax Act, which states that any movable and immovable property, whether tangible or intangible, is held by the assessee for any objective.

Under the provisions prescribed by the Income Tax Act, for capital gains, assets are categorised into 2 types relying on the holding time of the asset:

Short-term capital asset

Long-term capital asset

What are the exemptions under Sec 54?

Following the provisions under Section 54 of the IncomeTax Act, an individual or HUF can avail of tax exemptions while selling a residential property. The exemptions are from capital gains invested in the acquisition or building of the residential property.

The partnership firms, Limited Liability Partnerships, companies, or any other organisation or individual cannot claim the tax exemption prescribed under section 54. The prerequisites that must fulfill to avail the advantage of the said section are as follows:

The concerned purchase must be categorised as a long-term capital asset.
The asset must be a Residential House, and the income from such an asset is taxable as Income from House Property.
The vendor must have purchased the residential house either 1 year before the date of sale or 2 years post the date of sale. If the vendor is involved in constructing a house, the vendor enjoys an extended term, i.e. the seller will have to construct the residential house within 3 years from the date of sale. In the matter of a mandatory acquisition, the period of acquisition or construction will be defined from the date of permit of payment (whether original or additional compensation)
The new residential house should be located in India. The vendor cannot buy a residential house abroad and claim the exemption in India.
The above requirements are incremental. Therefore, even if the single specified circumstance is not fulfilled, the vendor cannot seek the benefit of the exemption under Section 54.

What are the differences between Section 54 and Section 54F

The difference between section 54 and section 54F are as follows:

1. Section 54 extends the exemption to the residential house when sold, whereas Section 54F extends the exemption to any capital asset other than the residential house is sold.

2. Section 54 extends the exemption only to long term capital gain is invested in the acquisition of one residential house, whereas in the case of section 54F, the net sales reference has to be supported in the purchase of residential house property

3. Section 54 defines no limitation on the number of residential houses the taxpayer owns on the date of sale of residential house property. In contrast, section 54F does not exempt the case when the vendor holds more than one residential house property on the date of selling.

4. Section 54 claims an exemption a taxpayer can purchase any other house property. Section 54F states that a taxpayer buys any other house property within 2 years or constructs within 3 years of sale.

What are the recent amendments made to section 54?

The due date to make submissions for asserting exemption under sections 54 to 54GB was extended. The exemptions were applicable on investment in bonds, purchase or construction of the residential property, the deposition of money, etc. The compliances might be completed before 30th September 2021. to be specific between 1st April 2021 to 29th September 2021.

Budget 2019 expanded the relevance of capital gain exemption under Section 54 by authorising the purchase or construction of 2 residential houses, replacing the previous allowance of only one residential house when the income is less than Rs. 2 crores. One can practice the option only once in the vendor's lifetime.
 


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