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When an individual sells property that they have been owners of for many years, there is a good chance that they have profited from the sale. If that is the case, they are liable to pay what is known as the Long Term Capital Gains Tax (LTCG). But, if the property seller is using the gains made from the sale of their property for purchasing or constructing a residential home, they can avail tax exemptions under Section 54 and 54F of the Income Tax Act. Let us now take a look at how one can do this and what is the difference between two sections.
When someone sells a residential property that they have owned for more than three years to buy a new one, he or she is eligible for exemptions under section 54 of Income Tax Act. However, he or she will only be eligible for the same if they meet the eligibility criteria.
When an individual sells any property and uses the money that came from the sale to purchase a residential property, he or she is eligible for tax exemptions under Section 54F of Income Tax Act. But, to be able to claim the same, the individual will have to meet the eligibility criteria.
Refer following Table
| Tax benefits under section 54 | Tax benefits under section 54F |
|---|---|
Available for people who made long term capital gains from the sale of a residential home. |
This tax exemption is available to only those who are making long term capital gains from the sale of any kind of property. |
Requires the individual to only invest the recorded long term capital gains made after paying the costs associated with buying/selling of the house. |
To avail the tax exemption under section 54F, the seller must invest all of their proceeds into the new property. |
No limitations on the ownership of other properties at the time of selling the property in question. |
The seller of the property is allowed to be the owner of only one additional property apart from the one that is being purchased/constructed. |
The tax exemptions under Sections 54 and 54F of the Income Tax Act can only be claimed on long term capital gains (LTCG). But, in order to do so, the individual will have to satisfy certain conditions. It must be noted that the conditions for being eligible for tax exemptions under section 54 and 54F are different. But, there are four common conditions that the individual must satisfy to avail a tax exemption under either of the sections. Let us take a look at them now.
1. Common Requirements between the two Sections
If the individual wants to purchase a residential home from the money they made from the property sale, he or she must do so within the time span of two years. If the individual satisfies this condition, then only they will be eligible for LTCG tax exemptions under sections 54 and 54F.
If the individual wants to construct a residential home from the money made from sale, the house must be fully constructed within 36 months from the sale to be eligible for exemptions.
If the individual fails to invest in a new property within the specified time frame, tax exemption can be claimed on the accrued capital gains by putting them in a public sector bank.
Only one of the two tax exemptions can be claimed on the capital gains that have been re-invested in a single property.
The LTCG tax exemption amount available under Section 54 of the Income Tax Act has to be lesser than the:
Gains arising from the transfer of residential house, or
The money spent in buying or making a new residential home. The balance capital gains, if any, will be deemed taxable.
For Example, if Mr. Jacob purchased a home in Mumbai for ₹2 crores, held on to it for 5 years and then sold it for ₹3 crores, his long term capital gains in such a scenario will be ₹20 lakhs ( Or 20 percent of the ₹1 crore he made from the sale). But then, Mr. Jacob purchases a home in the same locality for ₹2.5 crores within the stipulated time frame. This would mean that he re-invested ₹50 lakhs out of his capital gains of ₹1 crore in this new house. Hence, the LTCG tax amount that he will be liable to pay will only be calculated on the remaining ₹50 lakhs.
As per the observations made by the Income Tax Tribunal while giving verdict on a tax exemption case, they noticed that the two sections are completely independent of each other. This means that if they meet the criterias mentioned above and are purchasing a single home from the proceeds, the individual can claim exemptions under only one of the two sections. To claim tax benefits under both the sections, the individual will have to purchase or construct two residential properties from the proceeds.
Now that you are well aware of the nuances of tax exemption under Section 54 and Section 54F of the income tax act, ensure to make the most of it while purchasing a new property. However, if you don’t have any property or asset to sell for purchasing a new house, you can consider availing a home loan online at Bajaj Markets.
Capital gains is the profit made from buying and selling an asset. In the context of property purchase or sale, the money that the seller will make over and above the market price of the property at the time of purchasing it will be considered capital gains. Short term capital gains will attract a tax of 30 percent, while long term capital gains will attract an LTCG of 20 percent.
The indexed cost of the house is calculated. This can be calculated by adding up the price of the property at the time of its purchase to any renovation or home improvement costs. Then, this figure, along with the cost incurred at the time of selling the house, is subtracted from the actual selling price of the home. This helps one arrive at the net long term capital gains arising from a property.
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