Exemption from Capital Gain Tax in Case Transfer of Residential House Property

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 housePurchased 1Yr before, or 2Yrs after the date of transfer
    Constructing residential houseConstructing 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:

  1. Amount of capital gain generated on transfer of a residential house or
  2. 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.

What do We Mean by Transfer and Transaction not Regarded as Transfer

11 thoughts to “Exemption from Capital Gain Tax in Case Transfer of Residential House Property”

  1. Sir, my doubts ,as per current IT rules,
    1.can one invest capital gains in purchase of old property and get tax exemption
    2..what is the amount limit
    3.when an unsettled ancestral property is there (not in enjoyment of assessee but has a share) can one avail CG exemption by investment in separate property

    1. I am PIO resident in USA. I have purchased a house there about eight years back . For the payment of this house, I have taken a loan from my bank which I am paying back by installments which will continue for another five years.
      I had flat in Chandigarh which I sold after 10 years for which I am required to pay Capital Gains Tax. I propose to pay off the remaining installments of bank loan in USA from the amount I received by sale of my flat in Chandigarh.
      Since the money I received by sale of my property in India is being utilized for the purchase of property in USA, am I entitled to exemption in payment of Capital Gains Tax ?

      1. I am sorry, I have not put my query clearly. What I would like to know is , that even if the money earned in India is utilized for payment of the remaining installment of the loan taken from the bank for t the property purchased about 8 yrs back would entitle me exemption from Capital Gains Tax.

  2. I sold my property on Jan 2013. Capital Gain = 30 Lakhs.
    I booked a new property in April 2012, and have paid about 45 lakhs till date using personal funds. Now that i have got the 30 Lakhs capital gain on Jan 2013, can i show that as the amount invested in buying the new asset.

  3. Hi,
    I bought a property e.g. prop-x in Nov-2010, further I bought another property in Nov-2012 e.g. prop-y.

    Now, I want to sell prop-x and the short term gain from prop-x want to settle in home loan against prop-y.

    1. Do am I still need to pay tax on short term prop gain?

  4. i bought a flat in 1994 for 6 lakhs and sold it in 2011 for 70 lakhs. i bought, within 6 months , a property costing 73 lakhs. i now wish to sell the second property for 80 lakhs and buy another costing 100 lakhs. what would be the tax liability on the flat sold for 80 lakhs?
    dr seth

  5. Dear sir,
    I sold my house in July 2011 and made a long term capital gain of Rs 28L. As I could not buy a new house within a year , I deposited my LTCG in Capital Gain Deposit with a bank in July 2012. The second year is coming to a close and it does not look feasible for me to buy a new house. I am averse to invest in an under construction property. The bank has asked me to get a clearance from IT authority in case I would like to close the LTCG deposit account. A CA friend of mine has asked me to first pay the LTCG tax (20%) even before approaching the IT authority for a clearance. Should one first pay the tax when the fund is locked with the bank ? Kindly tell me know the steps involved if I have to close the LTCG deposit account. Thanks and regards,

  6. Dear Sir,
    Thanks for the information. I have one query. I sold a non agricultural land on 17 April 2013 after holding it for more than 4 years. I had booked a flat in early 2009 for which the registration of “agrrement to sale” with the builder happened on 24 Dec 2009, but got the possession of this flat only in Feb-2013. Can I claim advantage of “reinvesting in house property” to save long term capital gain tax relating to these transactions? As the actual possession date is within specified limit of 1 year before the land sell transaction, Can I claim investment in this flat from the long term capital gain arising from selling of the land? As on the Income Tax website, it shows clearly shows that the act of giving possession is treated as transfer for the purpose of Capital Gain. Please advice in this matter.

  7. Sir,
    I purchased a house in F.Y. 1998-99 at Rs. 5,43,100/ (That includes Rs.22,000/- free hold charges + Rs 20,100/- Stamp duty charges paid in Govt A/c)
    I sold the house in F.Y. 2012-13 at Rs. 42.50 Lac. As per CII, Indexed cost of acquisition comes = Rs. 13,18,294/-. In same F.Y. (2012-13), I purchased another house and paid Rs. 44,77,988/- to the developer. However, this house is under construction. All above transactions were made through cheque.
    May please suggest where to fill (which sheet and which column) the mentioned below data in ITR2 filling
    Rs. 5,43,100 or Rs. 13,18,294 as Indexed Cost of Acquisition
    Rs. 42.50 Lac – Sold price
    Rs. 44,77,988/- Investment for housing

    With Regards,

  8. Dear Sir,

    Whether I can sell my old property (about 22 years old) and out of the gain invest for purchase of a new flat in the name of my son or is it necessary that the new property has to be in my name? The investment in 1989 was about 2 lakhs and the present sale value is about Rs;50 lakhs and the new flat to be purchased in my son’s name costs around Rs.70 lakhs. How to go about it.

    Thanks in advance
    Best Regards

  9. In view of my occupation rights for past 27 years,whether I can get tax exemption for permanent accomodation(New flat). PL enlighten me.

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