When you sell any long term capital asset, there are huge gains which are to be taxed at a rate of 20%. Now the gain being very large, the resultant tax also comes out to be a lump sum. This tax is termed as Long Term Capital Gain Tax. For this reason, the Government of India has set certain rules where one can claim exemption from paying such a huge amount but only if he or she reinvests that lump sum in the mentioned forms of investment. Therefore, it is important to understand the provisions of deduction u/s 54 to save the tax liability under long term capital gains
Tax Planning of Capital Gains – deduction u/s 54- What is Section 54 of Income Tax Act all about?
According to the Section 54 of Income Tax Act, if there is any long-term capital gain, which has emerged due to an individual or any Hindu Undivided Family (HUF) by selling a residential property which was either on rent or self-occupied can be exempted if the capital that is gained is further invested in –
- Purchasing a different residential property. However, the purchase should be made within a year or two from the date of transfer of the property that was sold.
- Construction of a residential property. This should commence within three years from the date of transfer of the property that was sold.
What is the Quantum of deduction as per Provisions of Section 54 of Income Tax Act?
Capital gains can be exempted in the following manner according to the Section 54 –
- If the total amount under consideration is less than or equal to the cost undertaken for the new house, then the exempted amount should include the entire capital gain.
- If the cost of the new residential construction is less than the total capital gain, then the exempted amount will include the cost of the new residential construction.
Some important points about Section 54 of Income Tax Act to save on Capital Gains Tax Liability
- Starting with the financial year 2014-15, the Budget of 2014 had made an amendment to Section 54. The amendment stated that the exemption which is there under Section 54 can be feasible only if the amount is reinvested in only 1 house in India.
- Even if the amount id reinvested in a house that is under construction, then also the exemption will prevail but for that, a tax is levied which is called the under construction property tax.
Gopal Saran Darbari versus Income Tax Officer Case as an example of Section 54 of Income Tax Act
The assessee, of about 76 years of age, had incurred a long-term capital gain amounting to Rs. Rs. 4978349. He gained this by selling a flat at Mandakini Enclave in New Delhi. The appealing party had claimed a deduction amounting to Rs. 5227000 considering that the amount given the capital gain account scheme is Rs 36 Lacs and purchase of the new house was made for Rs. 1527000. But the assessing officer granted the assessee a deduction amounting to Rs. 901349 stating that –
- The amount allotted to capital gain account was Rs 35 Lacs instead of Rs 36 Lacs as was mentioned.
- The amount that was claimed to have been invested in a new house, that is Rs. 1527000, included Rs. 950000 for other houses and not the ‘new house’.