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  • Writer's pictureShruti Sharma

Section 54 of the Income Tax Act- Profit on sale of property used for residence.

Updated: Oct 14, 2022






The sale of a residential property is exempt from capital gains tax under Income Tax Act Section 54. According to the clause, taxpayers are only eligible for exemption from capital gains tax if they use the sale profits to buy another residential property. Residential property owners frequently sell their homes in order to buy new ones for a variety of reasons, including job transfers, retirement, and so forth. In this scenario, a taxpayer sells a property not to profit from the sale's revenues but rather to change residences. As a result, under Section 54 of the Income Tax Act, a taxpayer is free from capital gains when they sell one residential property and buy another.

The assets are divided into two main categories for capital gains, which are:

Capital assets referred to as short term capital assets are those that a person holds for a period of no longer than 36 months. These assets' sales generated gains known as short-term capital gains.

Long-term capital assets are those that the assessee has been in possession of for longer than 36 months. Long-term capital gains are the profits from selling these possessions.

Long-term capital assets include unlisted shares, land, and other immovable property that have been held for longer than 24 months.

Eligibility under Section 54 of the Income Tax Act

This section allows an assessee to apply for a tax exemption when they sell one residential property, which is a long-term capital asset, and purchase another residential property. The following requirements must be met by the applicants in order to qualify for this exemption:

  1. This benefit is only available to individuals or HUF. The advantages of this area are not available to the businesses.

  2. The taxpayer's home should be considered a long-term capital asset.

  3. Residential real estate should be the item being sold. The income from this asset should be reported under the heading "home property income."

  4. The new residential property should be acquired either one year before to the transfer date or two years following the transfer date. If a new home is being built, the owner is permitted an additional three years from the date of transfer or sale to complete the project.

  5. The residential property should be purchased in India.

The individual cannot claim an exemption under section 54 of the income tax act if any of the aforementioned requirements are not met by them. Only this type of transaction by the taxpayer qualifies for the exemption provided by section 54.

Amount of capital gain exemption available under section 54:-

Section 54 of the Income Tax Act permits a taxpayer to claim the lowest of the two exemption amounts:

  • Amount of capital gains on residential property transfer or investment in constructing or

  • purchasing new residential property

The balance amount (if any) will be taxable as per the income tax act.

The necessary requirements to qualify for exclusions under Section 54:-

In order for us to qualify for the exemptions under section 54, the taxpayer has a number of requirements. These are as follows:

  1. To qualify for this exemption, the assessee must purchase new residential property or build new house property after selling the old.

  2. The new residential property must be either built within three years of the date of transfer or sale, or it must be purchased one year before to the sale of the old property, two years following the sale of the home property, or both.

  3. The person can only build or buy one residential property in order to be eligible for the incentive.

  4. The person can deposit the proceeds from capital gains in the Capital Gains Account Scheme at any public sector bank and qualify for the exemption from this provision even if they don't build or buy new housing within the allotted time.

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