CAPITAL GAINS - SALE OF HOUSE

Section 54 of the Income Tax Act – Capital Gain Exemption
Introduction to
First, let us understand which portion of the income is taxable on the sale of the property. Is that the full amount received from the sale of the property? The answer to that is NO. Simply put, it is only the profit earned by the individual on the sale of the property that is taxable. As per the Income Tax Act, for the purpose of capital gains, the assets are classified into two types:
-Asset of short-term capital
-Long-term capital assets
What are the advantages of an asset being classified as a long-term capital asset?
The main advantage of the asset being defined as a long-term capital asset is that the assessee is eligible for indexation. In addition, certain exemptions are only eligible for long-term capital assets.
Exemption under Article 54
Where an individual sells a residential property and purchases another residential property, the individual will be eligible for exemption under section 54. The conditions for the benefit of the exemption provided for in Section 54 shall include:
-The taxpayer (i.e. the seller) must be an individual or a HUF. Thus, the benefits of this section can not be used by firms, LLPs and companies.
-Asset must be classified as a long-term capital asset.
-The asset sold is the Residential House. Income from a house of this kind should be charged as income from house property
-The seller should purchase a house either 1 year before the date of sale / transfer or 2 years after the date of sale / transfer. In the event that the seller builds a house, the seller has an extended period of time, that is. The seller will have to build a house within 3 years from the date of sale / transfer. In the case of compulsory acquisition, the period of acquisition or construction shall be fixed from the date of receipt of the compensation (whether the original or the additional compensation)
-The new residential house is supposed to be in India. The seller may not purchase or purchase a residence abroad and may not apply for an exemption.
The conditions set out above are cumulative. Thus, even if one condition is not satisfied, the seller can not benefit from the exemption provided for in Section 54.
How much exemption is available under Section 54 of the Income Tax Act?
The amount of exemption under Section 54 of the Income Tax Act for long-term capital gains will be the lower of the following:
-Capital gains arising from the transfer of the residence.
or
-Investment made in the purchase or construction of a new residential property. As a result, the balance of capital gains (if any) will be taxable.
To illustrate the following:
-Mr X sells his villa for Rs 45.000.000/-
-With the proceeds of the sale, he buys another villa for Rs 20,00,000/-
-Capital Gains will be calculated as follows
Specifics
Office (Rs)
Capital gain on the transfer of the house
45.000.000,00.00
Less: Investment in residential property
20.000.000.00
Balance – Gains of capital
25.000.000.00
What are the provisions relating to the transfer of property after the benefit is claimed under Section 54?
If the new house is sold within 3 years from the date of purchase or construction, the exemption claimed earlier under section 54 shall be indirectly taxable in the year of sale of the new house.
Consider two scenarios where the new house is sold within 3 years from the date of purchase or construction:
Case 1: The cost of the new house purchased is less than the capital gains calculated on the sale of the original house.
Generally, when a house is sold, the profit is considered to be capital gains. However, if the new house is sold within 3 years from the date of purchase or construction, the cost of acquisition will be considered as Nil. There will therefore be an indirect increase in taxable capital gains
Example:
Mr Y sold residential property in May 2015 and the capital gains amounted to Rs. 30.000.000/-
In June 2015, Mr Y purchased a residential property worth Rs. 18.000.000/-
Mr Y sells new residential properties (purchased in June 2015) for Rs. 35.000.000/-in December 2016.
On the basis of the above facts, allow Mr Y to calculate taxable capital gains.
FY 15-16 (Properties sold in May 2015)
Specifics
Office (Rs)
Capital gain on the transfer of the house
30.000.000.00
Less: Investment in residential property
18.000.000.00
Balance – Taxable capital gains In fiscal year 15-16
12,000,000.00
FY 16–17 (Property sold in December 2016)
Specifics
Office (Rs)
Consideration of the transfer (Sale Consideration)
35.000.000.00
Less: Acquisition cost
Uh, NIL
Balance – Taxable capital gains In fiscal year 16-17
35.000.000.00
Note: As the new property for which the deduction was claimed pursuant to Section 54 was sold in December 2016 (i.e. within 3 years from the date of acquisition), its acquisition cost was considered to be NIL. As a result , the entire sale consideration was considered to be capital gains. If the property had been sold after 3 years , i.e. after June 2018, the acquisition cost would have been available as a deduction and the capital gains would have been reduced.
Case 2: The cost of the new house purchased is more than the capital gains calculated on the sale of the original house.
If the cost of the new asset purchased is greater than the capital gains, then it is clear that there will be no capital gains as all capital gains will be exempted.
However, if the new house is sold within 3 years, the cost of the new house will be calculated as follows:
Specifics
Office (Rs)
Original Costs
XXXXX
Less: Capital gains claimed in respect of earlier house property
XXXXX
Cost of the new home
XXXXX
Example:
Let's use an example to understand the above case.
Mr. Z sold residential property and the capital gains amount to Rs 25.000.000/-in June 2015. October 2015,
Mr. Z bought a new residential property of Rs 40,00,000/-
In January 2017, Mr. Z sold a new residential property for Rs 55.000.000/-
On the basis of the capital gains mentioned above, let us calculate the taxable capital gains for Mr. Z.
FY 15-16 (Properties sold in June 2015)
Specifics
Office (Rs)
Capital gain on the transfer of the house
25.000.000.00
Less: Investment in residential property
40.000.000.00
Balance – Taxable capital gains In fiscal year 15-16
Uh, NIL
FY 16-17 (Property sold on January 2017)
Specifics
Office (Rs)
Consideration of the transfer (Sale Consideration)
55.000.000,00.00
Less: acquisition cost (see working note below)
$15,00,000.00
Balance – Taxable capital gains In fiscal year 16-17
40.000.000.00
Work Note 1:
Acquisition cost calculation (As the property was sold within 3 years of purchase and Section 54 was claimed)
Specifics
Office (Rs)
Acquisition cost
40.000.000.00
Less: Capital gains claimed in respect of earlier house property
25.000.000.00
Costs of the new house (to be considered)
$15,00,000.00
What's the Capital Gains Account Scheme?
If the asset is sold in the PY and the seller intends to purchase the new house as the time limit of 2 years or 3 years has not yet expired, the assessor is required to deposit the amount of the gain in the capital gains account scheme (in any branch of the public sector, bank) before the due date for filing the income tax returns.
The amount already incurred for purchase / construction, together with the amount deposited in the capital gains account scheme, may be claimed as a cost while claiming the deduction.
However, if the amount deposited in the Capital Gains Account Scheme is not used within the time limit indicated, it shall be treated as income of the preceding year in which 3 years have elapsed (from the date of transfer of the original asset).
Section 54 vs Section 54F
Earning income automatically assumes the responsibility of taxpayers to pay income tax on such income, and this is also the case with capital gains. However, income tax legislation allows taxpayers to claim certain exemptions from capital gains, which will help to reduce their tax output. Two such very important exemptions can be claimed under Sections 54 and 54F. (edited) As discussed above, the exemption under Section 54 is available for long-term capital gain on sale of household property. Exemption under Section 54F is available for long-term capital gain on sale of any asset other than household property.
Common requirements for the two Sections
-A new residential property must be purchased or constructed in order to qualify for an exemption.
-The new residential property must be purchased either 1 year before the sale or 2 years after the sale of the property.
-Alternatively, the new residential property must be constructed within 3 years of the sale of the property / asset.
-If you are unable to invest the specified amount in the manner indicated above before the date of tax filing or 1 year from the date of sale, whichever is earlier, deposit the specified amount in a public sector bank (or other banks as provided for in the Capital Gains Account Scheme, 1988).
-Only one house property can be bought or built.
Differences between the two sections
Section 54 and 54F
In order to qualify for the full exemption, all capital gains must be invested.
In order to claim full exemption, all sales receipts must be invested.
In the event that not all capital gains are invested – the amount not invested is taxed as long-term capital gains.
In the event that not all sales receipts are invested, the exemption is granted proportionately.
[Exemption = New House Cost x Capital Gains / Receipts for Sales]
At the time of sale of the original asset, you should not own more than one residential house.
This exemption will be reversed if you sell this new property within 3 years of purchase and the capital gains from the sale of the new property are taxed as short-term capital gains.
This exemption will be reversed if you sell this new property within 3 years of its purchase.