Section 54 series: Capital Gain Tax Exemption in 2023

If any residential house is sold in India and any gains arise, they are chargeable to tax. Gain will be calculated as the difference between the sale price and the cost of the asset. If the asset is long term (held for 24 months and more), the rate is 20%, and if it is short-term, it is chargeable at the slab rate applicable to individuals and HUF. E.g., if the sale price of the residential house is Rs. 3 crore and the cost of the asset is Rs. 1 crore, assuming the asset is held for more than 24 months, the gains will be Rs. 2 crore (3 crore – 1 crore). Tax payable will be 20% of such gains, i.e., Rs. 40 lakhs. To save tax on this sale of residential property, Section 54 comes into play.

* Eligible persons: Individuals and HUF

The following conditions need to be satisfied:

• There should be a transfer of residential house

• It must be a long-term capital asset (held for 24 months or more).

• Income from such a house should be chargeable under the heading "Income from house property."

• The new residential house should be in India. The seller cannot buy or purchase a residential house abroad and claim the exemption.

• From April 1, 2023, the capital gains tax exemption under Sections 54 to 54F will be restricted to Rs. 10 crore.

All of the above conditions need to be satisfied for an exemption from capital gains.

Amount of exemption under Section 54:

• If the cost of a new residential house exceeds long-term capital gains, the entire long-term capital gains are exempt.

• If the cost of a new residential house is less than long-term capital gains, long-term capital gains to the extent of the cost of a new residential house are exempt.

E.g., 1 If the long-term capital gains are 3 crores and the cost of the new house is 3.5 crores, then the entire 3 crores of long-term capital gains are exempt. Taxes payable will be nil.

E.g., 2 If the long-term capital gains are 3 crores and the cost of the new house is 2 crores, then the long-term capital gains of only 2 crores are exempt.

What if an asset transfers within 3 years?

If the new asset is transferred before 3 years from the date of its acquisition or construction, then the cost of the asset will be reduced by capital gains exempted earlier for computing capital gains. In short, you have to forego the capital gain exemption benefit claimed earlier.

Continuing the previous example,

If the new house was sold after 1 year for 5 crore, then the short-term capital gain chargeable to tax would be

Particulars	Amount
Net Consideration (sale value)	5 crore
Less: Cost of acquisition minus capital gains exempt earlier (3.5 crore – 3 crore).	0.5
Short-term capital gains are chargeable to tax.	4.5 Crore

Section 54 EC: Capital Gains Exemption through Investment in Certain Bonds

Any long-term capital gain arising from the sale of immovable property (land or buildings) is chargeable to tax at 20%. However, you get an exemption from such gains if you invest in certain bonds issued by the central government.

* Eligible person: Any person.

The following conditions need to be satisfied:

• There should be a transfer of a long-term capital asset (held for 24 months or more), be it land, a building, or both.

• The capital gains arising from such a transfer (sale) should be invested in a long-term specified asset within 6 months from the date of the transfer (sale).

• Such an investment can be redeemed only after 5 years.

• The maximum amount of exemption available is Rs. 50 lakh.

Eligible bonds under Section 54EC:

• National Highways Authority of India (NHAI)

• Rural Electrification Corporation Limited (RECL)

• Any other bond notified by the Central Government on this behalf

E.g., If the land is sold for Rs. 80 lakhs after being held for 3 years at the indexed cost of acquisition of Rs. 50 lakhs, LTCG is taxable at 30 lakhs. If an investment of Rs. 30 lakhs is made in the eligible bonds mentioned above, the LCTG chargeable to tax will be nil.

Wrapping up, Section 54 provides a crucial exemption to save tax on the sale of residential property. To claim this exemption, certain conditions need to be satisfied. From April 1, 2023, the exemption limit for capital gains under Sections 54 to 54F will be restricted to Rs. 10 crore. Additionally, Section 54 EC offers an exemption from long-term capital gains tax if invested in certain specified bonds within 6 months of the sale. It is essential to understand these provisions to maximize the benefits and minimize tax liability.