Capital Gain Exemptions on Property or any Other Asset Sale (Sections 54, 54F, 54EC)

Summary: The Income-tax Act provides capital gain exemptions under Sections 54, 54F, and 54EC for individuals or HUFs. Section 54 offers relief for long-term capital gains (LTCG) from the sale of residential property, allowing reinvestment into a new house within specific timeframes. If the cost of the new asset exceeds the LTCG, the entire gain is exempt; otherwise, the exemption is proportionate. An additional option allows reinvestment in two residential houses if the gains don’t exceed ₹2 crores. Section 54F applies to LTCG from non-residential assets, offering similar exemptions when reinvested in residential property, provided the assessee doesn’t own multiple houses. Section 54EC allows exemption if the proceeds are invested in bonds issued by government-backed entities like NHAI or REC within six months of the sale, capped at ₹50 lakhs. In all cases, there are specific timelines for reinvestment or deposit in a Capital Gains Account Scheme (CGAS). Violations of these conditions, such as selling the new asset within three years or taking loans against the bonds, can lead to the gains being taxed retroactively.

1. Section 54 of Income-tax Act,1961 (the Act)

- In case of an Individual or Hindu Undivided Family (“HUF”) having Income from Long Term Capital Gains (“LTCG”) arising from sale of Land or Building appurtenant thereto and being a Residential House and the assessee has within a period of 1 year before or within a period of 2 years, purchased or 3 years, constructed from the date of transfer, ONE Residential Property in India.

- Full amount of LTCG will be exempt, in case, cost of new asset exceeds LTCG. In case, cost of asset is less than LTCG, amount of exemption will be equal to cost of new asset and balance will be taxable at the tax rates specified.

- If the amount of Capital Gains does not exceed INR 2 crores, the assessee may at his option purchase or construct TWO Residential Houses in India and such option once exercised, it cannot be exercised again by the assessee.

- In case, new asset purchased or constructed is sold within 3 years from the date of purchased or constructed and amount of LTCG on old asset is more than the cost of new asset, cost for the purpose of computing capital gains of new asset shall be considered as NIL. For Example - LTCG is INR 2cr on sale of old asset, Cost of new asset is INR 1cr, sale of new asset is INR 1.5cr. LTCG will be INR 1.5cr on new asset.

- In case, new asset purchased or constructed is sold within 3 years from the date of purchased or constructed and amount of capital gains on old asset is less than the cost of new asset, cost for the purpose of computing capital gains of new asset shall be reduced with the amount of Capital Gains earned on old asset. For Example - LTCG is INR 2cr on old asset, Cost of new asset is INR 3cr, sale of new asset is INR 4cr. LTCG will be INR 3cr [4 (-) 3 (-) 2] on new asset.

- In case of LTCG which is not appropriated or not utilized for the purchase or construction before the date of furnishing of Income tax return under section 139 of the Act, the unutilized amount should be deposited in a bank account maintained with a Bank or Financial Institution under the “Capital Gains Account Scheme (“CGAS”)” before the due date of furnishing of Income-tax return under section 139(1) of the Act.

- In case, amount deposited in a CGAS is not utilized within the time specified above for purchase or construction, amount un-utilized shall be charged under section 45 of the Income-tax Act as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires and assessee shall be entitled to withdraw such amount in accordance with the CGAS.

- Further, exemption is available only upto INR 10 crores where cost of new asset exceeds INR 10 crores.

2. Section 54F of Income-tax Act,1961

- In case of an Individual or HUF having income from LTCG arising on sale of an asset NOT being a Residential House and the assessee has within a period of 1 year before or 2 years after the date of sale purchased or within a period of 3 years constructed ONE Residential Property in India.

- Full amount of LTCG shall be exempt, in case, cost of new asset exceeds Net Sales Consideration. In case, cost of asset is less than Net Sales Consideration, amount of exemption will be proportionate to the cost of new asset bears to the net consideration.

- Exemption shall not be available in the following cases:

• Where assessee owns more than one residential house, other than the new asset, on the date of transfer of original asset, or
• Where the assessee purchases any residential house, other than the new asset, within a period of one year after the date of transfer of original asset or
• Where the assessee constructs any residential house, other than the new asset, within a period of three year after the date of transfer of original asset

- Where any residential house has been purchased or constructed within a period of 1 year or 3 years respectively (other than the new asset), the amount of LTCG from the transfer of original asset not charged under section 45, shall be deemed to be income from LTCG in the year in which such residential house is purchased or constructed.

- Where the new asset has been transferred within a period of 3 years from the date of its purchase or construction (as the case may be), the amount of LTCG from the transfer of original asset not charged under section 45, shall be deemed to be income from LTCG in the previous year in which such new asset has been transferred.

- In case of LTCG which is not appropriated or not utilized for the purchase or construction before the date of furnishing of Income tax return under section 139 of the Act, the unutilized amount should be deposited in a bank account named CGAS before the due date of furnishing Income-tax return under section 139(1) of the Act.

- In case, amount deposited in a CGAS is not utilized within the time specified above for purchase or construction, amount un-utilized shall be charged under section 45 of the Income-tax Act as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires and assessee shall be entitled to withdraw such amount in accordance with the CGAS.

- Further, exemption is available only upto INR 10 crores where cost of new asset exceeds INR 10 crores.

3. Section 54EC of Income-tax Act,1961

- Where the LTCG arising from the transfer of a long-term capital asset being a land or building or both.

- The assessee within a period of 6 months from the date of transfer invested in a specified asset being any bond redeemable after 5 years and issued by the National Highways Authority of India (“NHAI”) constituted under section 3 of the National Highways Authority of India Act, 1988 or by the Rural Electrification Corporation Limited (“RECL”), a company formed and registered under the Companies Act, 1956 or any other bond notified in the official gazette by the Central Government.

- Full amount of LTCG shall be exempt, in case, cost of new asset exceeds LTCG. In case, cost of asset is less than LTCG, amount of exemption will be equal to the cost of new asset.

- Investment made in specified assets from LTCG arising from transfer of one or more original assets during the financial year in which original asset or assets are transferred and in subsequent financial year does not exceed INR 50 lakhs.

- Where the specified asset has been transferred or converted (otherwise than by transfer) into money at any time within a period of 5 years from the date of its acquisition, the amount of LTCG not charged in the year of transfer of original asset shall be deemed to be income from Capital Gains in the previous year in which the long-term specified asset is transferred or converted (otherwise than by transfer) into money.

- Further, in case, the assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have converted (otherwise than by transfer) such specified asset into money on the date on which such loan or advance is taken.