The income tax act grant total/ partial exemption from capital gain tax which may arise on transfer of residential house property by individual or HUF under section 54 of the income tax act but such exemption can only be claimed when individual fulfills the conditions given under section 54 of the income tax act. Also Read Which are the Assets not Taxed under Capital Gain Head of Income Tax Act
Conditions for claiming exemption from capital gain tax –
One should satisfied the following conditions in order to take exemption under sec-54
- Only a Hindu undivided family or individual can claim exemption
- Exemption is available only if capital asset transferred is residential house chargeable under head “Income from house property“.
- Capital asset transferred should be long term capital asset
- In order to claim exemption assess will have to construct or purchase a residential house old/new situated inside/outside India within given time limit.
Time -limit Purchasing a residential house Purchased 1Yr before, or 2Yrs after the date of transfer Constructing residential house Constructing should be completed within 3 years from date of transfer
A person shall be entitled to claim exemption under section 54 of the Act even in respect of a self-occupied residential house.Circular : No. 538, dated 13-7-1989. (Also Read What do We Mean by Long Term Capital Gain Tax)
Amount of the exemption will be minimum of below two:
- Amount of capital gain generated on transfer of a residential house or
- Amount invested in purchasing or constructing a new Residential house.
In case person is not able to utilize the amount of capital gain before furnishing the return under section 139 of the income tax act, 1961 then he shall deposit the amount in such bank deposit as notified by the central government for such person before furnishing return under section 139(1) of the income tax act. Also Read What is Considered as Personal Effects and Jewellery under Income Tax for Capital Gain Tax
Provided such deposit is to be utilized for purchase or construction within given time limit under section 54(1) of the income tax. In case amount is not utilized or partially utilized with given time limit then such remaining amount will be taxable in year in which such time limit expires. Also Read Capital Gain Exemption by making Investment in certain bonds of REC and NHAI
Reference: Section 54 of the Income Tax Act, 1961
Profit on sale of property used for residence.
54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then], instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost of the residential house] so purchased or constructed (hereafter in this section referred to as the new asset)], the difference between the amount of the capital gain and the cost of the new asset shall be charged under section45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or
(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.
(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—
(i) the amount not so utilised shall be charged under section 45 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
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.