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3/25/2019

Section 54 And Its Role When You Transfer Sale Proceeds of One Property Into Another

One tends to sell his/her property with an aim to earn profits. However, the profits you make through the transaction is taxable. The Indian tax laws say gains arising out of the transfer of a capital asset such as property are taxable under the head “capital gains”. These gains are bifurcated as short-term capital gains (STCG) head and the long-term capital gains (LTCG) head, depending on the period for which the asset is held. As per the current norms, long-term capital gains are taxed at 20 per cent, plus surcharge and education cess, and short-term gains are taxed at 15 per cent, plus surcharge and education cess. However, there's a way to save yourself from paying the capital gains tax. With Section 54 of the Income Tax (I-T) Act, you can plan to use the proceeds of the sale of your old residential property in acquiring another residential property. The act also exempts a seller from paying LTCG tax even if the saleable property is non-residential, and the profit gained so is being used to buy a residential property.

Learn the benefits, conditions and correct usage of Section 54:

1. The seller is eligible to avail the benefit from this Section only if he/she is an individual OR Hindu Undivided Family (HUF). By HUF, the section means all members of a family, including the extended family members. Jains, Sikhs and Buddhists are equally covered.

2. The property aimed for selling should be a residential asset and should have been held by you for a long term. A short-term held property is not eligible to avail the benefits. To qualify as a long-term capital asset, the period of holding, in case of immovable property is reduced from 36 months (three years) to 24 months (two years) from the assessment year 2018-19.

3. The condition of buying the new property one year before the sale of the old one or within two years the sale of the old property needs to be fulfilled to avail the benefits. In case of planning to construct a house on your own, the undertaking must be carried out within three years from the date of transfer of your old property. If the acquisition is a compulsory one, the period of acquisition or construction will be determined from the date of receipt of compensation to understand whether it's original or additional.

4. From the assessment year 2015-16 onwards, the exemption under Section 56 can be claimed only in respect of one residential house property purchased or constructed in India. The exemption under Section 54 is available just for one property. You will be eligible to get tax benefits in a situation where you are selling multiple properties to buy one single residential unit, only if the transaction carried out is within the stipulated time frame.

5. In case you bought a property outside India using the sale proceeds of a property that you held in India, no exemption can be claimed for the house purchased outside India.

6. What is the amount of exemption provided under Section 54? It is either the amount of capital gains arising on transfer of residential house or the amount invested in the purchase/construction of new residential house property.

7. In case you are happy with the new property and want to sell it soon, the law says, the benefit granted under Section 54 will be withdrawn if you transfer the new house within three years from the date of acquisition.

8. According to the act, if the capital gains arising on transfer of the house are not utilised, the unutilised amount must be deposited in Capital Gains Deposit Account Scheme to gain the benefit of the exemption. By utilisation of capital gains, we mean the amount either in whole or in part to purchase another house till the date of filing the income tax returns. To deposit the amount, approach any branch of a public sector bank. The enactment of the Gains Deposit Accounts Scheme (1988) has made this provision come into force.

9. What if the amount lying in Capital Gains Account Scheme account is not utilised within a specified period? The unutilised amount, for which exemption is claimed, will be taxed as income by way of long-term capital gains of the year in which the specified period ends. However, it is not mandatory for the taxpayer to use the capital gains amount lying in the account to make the new house purchase. The money from other sources could be used to do that and can still claim the tax exemption.

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