Exemption of capital gain on sale of residential House.

Question BankCategory: Income TaxExemption of capital gain on sale of residential House.
AvatarR Kumar asked 3 months ago

I have sold my residential house and planning to purchase a new house. I have capital gain on sale of old house. Do I require to buy a new house before filing ITR to be eligible for exemption of capital gain. How capital gain on sale of old house be exemption by purchasing a new house. 

1 Answers
AvatarAditya answered 3 months ago

Exemption of long term capital gain on sale of house property and on purchase of another house property.(Section 54)
As per section 2(14) of Income tax Act, House property is a capital assets and capital gain arising from transfer of capital assets is liable to tax under the head Capital gain. 
But in your case, You have sold an house property and planning to buy a new house hence section 54 is available for you for  exemption long term capital gain. 
Section 54 of income tax Act, provide exemption towards Long Term Capital Gain arising on sale of residential property. Only the individual or HUF who has sold residential property and bought another residential property can avail the benefit of exemption under section 54 the Income Tax Act provided following conditions are satisfied:-

  1. The exemption benefit under section 54 is available only to an individual or a Hindu Undivided Family (HUF).
  2. The capital asset transferred should be a ‘Residential House Property’. Further, income from such a residential house property should be chargeable under the head ‘Income from House Property’.
  3. The capital asset transferred should be a ‘Long term capital asset’. It means, you must have owned the old house for at least 36 months. 
  4. The taxpayer should acquire another residential house within a period of one year before or two years after the date of transfer of old house OR He should construct a residential house within a period of three years from the date of transfer of the old house.
  5. In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional). 
  6. Exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India. But With effect from Assessment Year 2020-21, the Finance Act, 2019 has amended Section 54 to extend the benefit of exemption in respect of investment made in two residential house properties. The exemption for investment made, by way of purchase or construction, in two residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. If assessee exercises this option, he shall not be entitled to exercise this option again for the same or any other assessment year
  7. In case all the conditions laid down under section 54 are satisfied, the amount of exemption available would be lower of the following –

    • Investment made towards purchase or construction of the residential house property; or
    • Long term capital gain arising on transfer of the residential house property.
  8. The assessee must hold the newly purchased or constructed house for a period of three years. In case the assessee sells the newly purchased or constructed house before the period of completion of three years from the date of purchase or date of completion of construction, then the exemption benefit availed under section 54 would be withdrawn (cost of new house will be reduced by the amount of exemption availed earlier)

Capital Gains Deposit Account Scheme –
When the capital gain arising on transfer of the residential house is not utilized for purchase / construction of a new house till the date of return filing, then, in order to claim the exemption, the unutilized amount is required to be transferred to ‘Capital Gains Deposit Account Scheme’.
The new residential house can be purchased / constructed by utilizing the amount deposited in the ‘Capital Gain Deposit Account Scheme’ within the prescribed time. However, in case the amount deposited is not utilized within the prescribed time, then, the unutilized amount will be treated as income of the previous year in which the period of 2 year / 3 years expires.

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