LTCG Exemption Under Section 54: How to Report It Correctly
- Asharam Swain
- Jul 22
- 8 min read
Long-term capital gains (LTCG) refer to the profit earned from the sale of a capital asset held for more than the specified holding period, which is generally more than 24 months for assets like real estate and bonds, and more than 12 months for listed shares and equity-oriented mutual funds. From July 23, 2024, a uniform LTCG tax rate of 12.5% without indexation applies to all assets, including real estate, stocks, and bonds. For properties acquired before this date, taxpayers can choose to pay LTCG tax at either 12.5% without indexation or 20% with indexation, allowing adjustment of cost for inflation. Exemptions under Section 54 and related provisions are still available to encourage reinvestment of gains in specified assets, thereby reducing taxable income and overall tax liability. It is important to follow the prescribed guidelines carefully and report these correctly in your Income Tax Return (ITR) to claim these exemptions.
Table of Contents
What is LTCG Exemption Under Section 54?
LTCG exemption under Section 54 of the Income Tax Act provides relief to taxpayers who have long-term capital gains from the sale of a residential property. The section allows taxpayers to exempt a portion of their LTCG if the gains are used to purchase or construct another residential property within a specified period. The exemption applies only to the sale of residential properties, and the newly acquired property must meet certain conditions to qualify for the exemption.
The primary goal of Section 54 is to encourage the reinvestment of capital gains in the real estate sector, promoting homeownership and reducing tax burdens for individuals reinvesting their earnings from property sales.
Key Requirements for LTCG Exemption Under Section 54
To qualify for LTCG exemption under Section 54, the taxpayer must meet several conditions:
Nature of the Asset: The exemption is available only on the sale of a residential property. The capital gains must arise from the sale of such an asset to qualify for the exemption.
Reinvestment in Residential Property: To claim the exemption, the taxpayer must reinvest the capital gains in another residential property. The new property can be either purchased or constructed, but the timeline for this reinvestment is critical.
Timeline for Reinvestment: The new property must be purchased within 1 year before or 2 years after the sale of the original property. If the taxpayer chooses to construct a new property, the construction must be completed within 3 years from the date of sale.
Amount of Exemption: The exemption is available to the extent of the capital gains arising from the sale of the property. If the reinvestment amount is less than the capital gains, only the portion of the capital gains equal to the reinvested amount will be exempt. If the entire amount of the capital gains is reinvested, the exemption will apply to the full amount.
Holding Period of the Property Sold: The property being sold must have been held for more than 2 years to qualify for long-term capital gains. If the property is sold within 2 years, the gains will be classified as short-term capital gains and will not be eligible for the Section 54 exemption.
How to Report LTCG Exemption in Your ITR
Reporting LTCG exemption in your ITR is a crucial step in ensuring you comply with tax laws while reducing your tax liability. Here’s how you can report LTCG exemption under Section 54 in your Income Tax Return:
Choose the Correct ITR Form: To report LTCG exemption, you need to file ITR-2 or ITR-3, depending on your source of income. ITR-1 is not suitable for individuals reporting capital gains.
Declare the Sale of Property: In the ITR form, under the "Income from Capital Gains" section, you will need to report the details of the property sold, including the sale proceeds, cost of acquisition, and capital gains earned.
Claim the Exemption: In the same section, you will be asked to declare the amount of capital gains eligible for exemption under Section 54. Enter the reinvested amount in the designated column.
Attach Supporting Documents: You will need to provide proof of reinvestment, such as sale agreements, purchase agreements for the new property, and construction details. Ensure all documentation is attached as per the guidelines.
Calculate and Report the Exemption: The form will automatically calculate the taxable LTCG after applying the exemption. Ensure that the exemption amount corresponds to the actual capital gains reinvested in the new property.
Latest Amendments and Changes in Budget 2023/2024
The Budget 2023/2024 introduced a few significant changes regarding the LTCG exemption under Section 54:
Increase in Reinvestment Period: The government has extended the timeline for reinvesting capital gains in residential properties to further support taxpayers affected by the pandemic. The period has been increased, giving taxpayers more flexibility to reinvest their gains.
Revised Exemption Limits: The exemption limit for reinvestment has been adjusted in the latest budget to make it easier for taxpayers to take advantage of this provision. The amendment also includes provisions for properties acquired in rural areas, making the exemption more inclusive.
Clarification on Exemption for Multiple Properties: Previously, taxpayers could claim the exemption only for one property. However, the budget 2023/2024 clarified that the exemption can be applied to the purchase of more than one residential property if the capital gains are up to ₹2 crore, giving taxpayers additional flexibility in property investments.
Common Mistakes to Avoid While Reporting LTCG Exemption
When claiming LTCG exemption under Section 54, there are a few common mistakes that taxpayers should avoid to ensure accurate filing:
Incorrect Property Classification: Ensure that the property being sold is classified correctly as residential. Selling a commercial property or land does not qualify for the exemption under Section 54.
Missed Reinvestment Timeline: Make sure that the new property is purchased or constructed within the prescribed timelines (1 year before or 2 years after the sale for purchase and within 3 years for construction). Missing these deadlines can disqualify you from claiming the exemption.
Incomplete Documentation: Inadequate documentation of the sale and purchase agreements or construction details can lead to delays or rejection of the exemption claim. Keep all records organized and in compliance with the requirements.
Failure to Report Partial Exemption: If only a portion of the capital gains is reinvested, you are entitled to a partial exemption. Ensure you accurately report the amount of reinvested gains to avoid issues during assessment.
Simplify LTCG Reporting with TaxBuddy
TaxBuddy simplifies the reporting of LTCG exemption by providing easy-to-use tools that help you calculate capital gains, track your reinvestments, and fill out the necessary forms. The platform ensures that all required documentation is included and reduces the risk of errors in reporting, giving you peace of mind during tax season. Whether you're claiming exemptions for a single property or multiple properties, TaxBuddy guides you through the process seamlessly, ensuring maximum savings and compliance.
Conclusion
Claiming LTCG exemption under Section 54 offers significant tax relief, but it requires a clear understanding of the rules and proper reporting in your ITR. By meeting the eligibility criteria, following the prescribed timelines, and reporting the exemption accurately, you can reduce your tax liability. Using platforms like TaxBuddy ensures that the process is streamlined, and all your documentation is in place. For those looking to simplify LTCG reporting and maximize their exemptions, TaxBuddy offers a comprehensive solution for a hassle-free filing experience. For anyone looking for assistance in tax filing, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1: Can I claim LTCG exemption under Section 54 if I sell my commercial property? No, the exemption under Section 54 is specifically for the sale of residential property. If you sell commercial property, land, or any non-residential property, you are not eligible for this exemption. To benefit from Section 54, the property sold must be a residential property, and the proceeds should be reinvested in another residential property in India. TaxBuddy can help ensure your exemption claims align with the current rules.
Q2: Is there a limit to the number of properties I can claim the LTCG exemption for? Under the old provisions of Section 54, you could only claim the exemption for one residential property. However, with the introduction of the Budget 2023/2024, you can now claim the exemption for multiple properties, provided the total capital gains do not exceed ₹2 crore. This means that if your total capital gains are below ₹2 crore, you may qualify for exemptions on more than one property.
Q3: What documents do I need to provide to claim LTCG exemption? To claim the LTCG exemption under Section 54, you must provide documents like:
Sale agreements for the property being sold.
Purchase agreements for the new residential property bought or details of the property under construction.
Construction-related documents, if applicable, for properties being constructed with the gains.
TaxBuddy simplifies this process by helping you organize and upload all necessary documentation for a smooth claim.
Q4: Can I claim the LTCG exemption if I reinvest my gains in a property outside India? No, the LTCG exemption is only available when the reinvestment is made in a residential property located within India. Reinvesting in a property abroad does not qualify for the exemption, even if you use the proceeds for purchasing a property or constructing one in a foreign country.
Q5: What happens if I miss the reinvestment deadline for claiming LTCG exemption? The exemption under Section 54 is time-bound. You must reinvest the capital gains in the new residential property within two years from the sale date of the original property. If you miss this deadline, the LTCG exemption will not apply, and your capital gains will be fully taxable as income in the year of the sale.
Q6: How do I report LTCG exemption in my ITR? To report the LTCG exemption in your Income Tax Return (ITR), you need to declare the capital gains from the sale of the property, provide details of the reinvestment in a new residential property, and claim the exemption. TaxBuddy will guide you step-by-step through the ITR filing process, ensuring you enter the correct details and maximize your eligible exemptions.
Q7: Can I use LTCG exemption to reduce my overall taxable income? Yes, the LTCG exemption under Section 54 directly reduces the taxable capital gains arising from the sale of a residential property. This, in turn, lowers your overall taxable income for the financial year, potentially reducing your overall tax liability. TaxBuddy helps you optimize these exemptions to minimize your tax burden.
Q8: What if I sell more than one property and reinvest the gains? As per the latest amendments introduced in Budget 2023/2024, you can claim the LTCG exemption for more than one property, provided the total capital gains from both sales do not exceed ₹2 crore. If your total capital gains fall under this threshold, you can take advantage of the exemption for multiple property sales.
Q9: How long do I need to hold the property to qualify for LTCG? For a property to qualify for Long-Term Capital Gains (LTCG) treatment, it must be held for more than 24 months (2 years). If the property is sold before this holding period, the gains are treated as Short-Term Capital Gains (STCG), which are subject to higher tax rates. Holding the property for more than 2 years allows you to avail of the LTCG tax benefits.
Q10: Can I claim the LTCG exemption if I use the proceeds to buy a plot of land? No, the LTCG exemption under Section 54 is only available when the proceeds from the sale of the residential property are used to purchase or construct another residential property. Buying a plot of land, whether for investment or development, does not qualify for the exemption, as land is not considered a residential property.
Q11: What happens if I sell the new property before the specified holding period? If you sell the new property purchased with the LTCG exemption before completing 3 years of ownership, the exemption you claimed earlier will be reversed. In such cases, the capital gains from the sale of both the original and the new properties will be added to your income for the year in which the property is sold, and you will be liable to pay tax on it.
Q12: Can TaxBuddy help me calculate the LTCG exemption? Yes, TaxBuddy can help you calculate your LTCG, determine the eligible exemptions, and ensure that your ITR is filed correctly. By inputting the sale and purchase details into the platform, TaxBuddy will assist you in maximizing your eligible exemptions and filing an accurate tax return, saving you both time and money.
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