Tax break under 54EC only for Property sale

Last Updated at: October 22, 2019
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Tax break under 54EC only for Property sale

In terms of investment, the property is majorly considered as a great option. Just as it offers great profit, it is equally important to understand the taxable details related to it such as which section of the income is taxable and many more.

Here, we give you a detailed overview as per the income tax act, for the reason of capital gains, assets are divided into two categories:

  • Short-term capital asset
  • Long-term capital asset

 Benefit

The prime benefit of an asset being classified as a long-term capital asset is that the assessee is eligible for the benefit of indexation. In addition, there are some exemptions which are eligible only for long-term assets.

Exemption under Section 54

The amount of exemption under Section 54 of the Income Tax Act for long–term capital gains will be the lower of

  1. a) Capital gains arising on transfer of the residential house (or)
  2. b) The investment made during the purchase or construction of a new residential property. Therefore, the balance capital gains (if any) will be taxable.

For example: 

John sells his bungalow (residential property) for Rs. 45,00,000 and with the proceeds of the sale, he purchases another bungalow for Rs. 20,00,000; then the capital gains will be calculated as follows:

Particulars Amt (Rs)
Capital gain on transfer of the residential house 45,00,000.00
Less: Investment made in residential house property 20,00,000.00
Balance – Capital Gains 25,00,000.00

 

Provisions concerning the transfer of property after claiming benefit under Section 54

If the new house is sold within the time period of 3 years from the date of purchase or construction, then the exemption claimed earlier under Section 54 shall be indirectly taxable in the year of sale of the new residential property.

File Your Tax Returns

Let’s discuss the same with the help of examples:

Example 1:

Mary has sold a residential property in March 2016 for which the capital gains were Rs. 30,00,000

In April 2016 Mary decided to purchase a new house property worth Rs. 18,00,000

A year later in November 2017, Mary sells the residential property purchases in April 2016 for Rs. 35,00,000

Now lets us see how would her tax be calculated:

Particulars Amt (Rs)
Capital gain on transfer of the residential house 30,00,000.00
Less: Investment made in residential house property 18,00,000.00
Balance – Taxable Capital Gains In FY 16-17 12,00,000.00

 

FY 17-18 (Property sold in December 2017

Particulars Amt (Rs)
Consideration for transfer (Sale Consideration) 35,00,000.00
Less: Cost of Acquisition NIL
Balance – Taxable Capital Gains In FY 16-17 35,00,000.00

 

Note: As the new property for which deduction was claimed under Section 54 was sold in December 2017 (i.e. within 3 years from the date of acquisition), hence its cost of acquisition was considered as NIL. Therefore, the entire sale consideration was considered as capital gains. If the property had been sold after 3 years, i.e. after June 2019, then in such case the cost of acquisition would be available as a deduction and capital gains would decrease.

Example 2:

If the price of the new house purchased is more than the capital gains computed on the sale of the original house then in such a circumstance there will be no capital gains and the complete capital gains will be exempted.

But if the new residential property is sold within the time period of 3 years, then the cost of the new residential property will be considered as follows:

Rohan has sold a residential house property and the capital gains are Rs 25,00,000/- in June 2016.

In October 2016, Riya purchased a new residential house property of Rs 40,00,000/-

In January 2018, Rohan sold the new residential house Property for Rs 55,00,000/-

Based on the capital gains mentioned above, let’s compute the taxable capital gains for Riya

FY 16-17 (Property sold in June 2016)

Particulars Amt (Rs)
Capital gain on transfer of the residential house 25,00,000
Less: Investment made in residential house property 40,00,000
Balance – Taxable Capital Gains In FY 16-17 NIL

 

FY 16-17 (Property sold in January 2018)

Particulars Amt (Rs)
Consideration for transfer (Sale Consideration) 55,00,000
Less: Cost of Acquisition 15,00,000
Balance – Taxable Capital Gains In FY 16-17 40,00,000

 

As the property was sold within 3 years of purchase and Section 54 was claimed

Particulars Amt (Rs)
Cost of Acquisition 40,00,000.00
Less: Capital gains claimed for earlier house property 25,00,000.00
Cost of the new house (to be considered) 15,00,000.00

 

Budget 2018 amendment to Section 54EC

This new amendment offers an exemption of long-term capital on sale of any Long Term Capital Asset where the capital gains are invested within a time period of 6 months from the date of transfer, in certain long term specified assets via any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 or by the Rural Electrification Corporation Limited(REC).

The above section has restricted its scope only to capital gains arising from long-term capital assets, being land or building or both. It is also proposed to provide that long-term specified asset, for making any investment under the section on or after the 1st day of April, 2018, shall mean any bond, redeemable after five years as against the earlier three years and issued on or after 1st day of April, 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf.

This amendment has taken effect, from 1st April 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.

Conclusion

When there is any kind of dealing related to the residential property this will be the detailed guide for everyone. To know more, connect with our expert team at Vakilsearch

Tax break under 54EC only for Property sale

1257

In terms of investment, the property is majorly considered as a great option. Just as it offers great profit, it is equally important to understand the taxable details related to it such as which section of the income is taxable and many more.

Here, we give you a detailed overview as per the income tax act, for the reason of capital gains, assets are divided into two categories:

  • Short-term capital asset
  • Long-term capital asset

 Benefit

The prime benefit of an asset being classified as a long-term capital asset is that the assessee is eligible for the benefit of indexation. In addition, there are some exemptions which are eligible only for long-term assets.

Exemption under Section 54

The amount of exemption under Section 54 of the Income Tax Act for long–term capital gains will be the lower of

  1. a) Capital gains arising on transfer of the residential house (or)
  2. b) The investment made during the purchase or construction of a new residential property. Therefore, the balance capital gains (if any) will be taxable.

For example: 

John sells his bungalow (residential property) for Rs. 45,00,000 and with the proceeds of the sale, he purchases another bungalow for Rs. 20,00,000; then the capital gains will be calculated as follows:

Particulars Amt (Rs)
Capital gain on transfer of the residential house 45,00,000.00
Less: Investment made in residential house property 20,00,000.00
Balance – Capital Gains 25,00,000.00

 

Provisions concerning the transfer of property after claiming benefit under Section 54

If the new house is sold within the time period of 3 years from the date of purchase or construction, then the exemption claimed earlier under Section 54 shall be indirectly taxable in the year of sale of the new residential property.

File Your Tax Returns

Let’s discuss the same with the help of examples:

Example 1:

Mary has sold a residential property in March 2016 for which the capital gains were Rs. 30,00,000

In April 2016 Mary decided to purchase a new house property worth Rs. 18,00,000

A year later in November 2017, Mary sells the residential property purchases in April 2016 for Rs. 35,00,000

Now lets us see how would her tax be calculated:

Particulars Amt (Rs)
Capital gain on transfer of the residential house 30,00,000.00
Less: Investment made in residential house property 18,00,000.00
Balance – Taxable Capital Gains In FY 16-17 12,00,000.00

 

FY 17-18 (Property sold in December 2017

Particulars Amt (Rs)
Consideration for transfer (Sale Consideration) 35,00,000.00
Less: Cost of Acquisition NIL
Balance – Taxable Capital Gains In FY 16-17 35,00,000.00

 

Note: As the new property for which deduction was claimed under Section 54 was sold in December 2017 (i.e. within 3 years from the date of acquisition), hence its cost of acquisition was considered as NIL. Therefore, the entire sale consideration was considered as capital gains. If the property had been sold after 3 years, i.e. after June 2019, then in such case the cost of acquisition would be available as a deduction and capital gains would decrease.

Example 2:

If the price of the new house purchased is more than the capital gains computed on the sale of the original house then in such a circumstance there will be no capital gains and the complete capital gains will be exempted.

But if the new residential property is sold within the time period of 3 years, then the cost of the new residential property will be considered as follows:

Rohan has sold a residential house property and the capital gains are Rs 25,00,000/- in June 2016.

In October 2016, Riya purchased a new residential house property of Rs 40,00,000/-

In January 2018, Rohan sold the new residential house Property for Rs 55,00,000/-

Based on the capital gains mentioned above, let’s compute the taxable capital gains for Riya

FY 16-17 (Property sold in June 2016)

Particulars Amt (Rs)
Capital gain on transfer of the residential house 25,00,000
Less: Investment made in residential house property 40,00,000
Balance – Taxable Capital Gains In FY 16-17 NIL

 

FY 16-17 (Property sold in January 2018)

Particulars Amt (Rs)
Consideration for transfer (Sale Consideration) 55,00,000
Less: Cost of Acquisition 15,00,000
Balance – Taxable Capital Gains In FY 16-17 40,00,000

 

As the property was sold within 3 years of purchase and Section 54 was claimed

Particulars Amt (Rs)
Cost of Acquisition 40,00,000.00
Less: Capital gains claimed for earlier house property 25,00,000.00
Cost of the new house (to be considered) 15,00,000.00

 

Budget 2018 amendment to Section 54EC

This new amendment offers an exemption of long-term capital on sale of any Long Term Capital Asset where the capital gains are invested within a time period of 6 months from the date of transfer, in certain long term specified assets via any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 or by the Rural Electrification Corporation Limited(REC).

The above section has restricted its scope only to capital gains arising from long-term capital assets, being land or building or both. It is also proposed to provide that long-term specified asset, for making any investment under the section on or after the 1st day of April, 2018, shall mean any bond, redeemable after five years as against the earlier three years and issued on or after 1st day of April, 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf.

This amendment has taken effect, from 1st April 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.

Conclusion

When there is any kind of dealing related to the residential property this will be the detailed guide for everyone. To know more, connect with our expert team at Vakilsearch

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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.