Homebuyers are eligible for various tax benefits while purchasing a property. Under section 54 of the Income Tax Act, individuals are eligible for tax benefits if they purchase a residential property by selling their existing property. The amount of exemption will either be the capital gains arising on transfer of residential house or the investment made in the purchase of the new house, whichever is lower.
Section 54 of the Income Tax Act
In order to avail the benefits of tax exemption under section 54, the taxpayer must satisfy the following conditions:
The taxpayer should be an individual or Hindu Undivided Family (HUF). Companies and businesses are not eligible to avail tax benefits under Section 54.
The property sold should be a residential property. Moreover, the seller should purchase a new residential property either 1 year before the date of transfer of old property or 2 years after the date of transfer of the old property. If the seller is constructing a house rather than purchasing a new property, he/she will have to ensure that the construction of the new property is completed within 3 years from the date of sale/transfer.
The new residential property being purchased should be in India. The seller won’t be eligible for any kind of tax exemption if the purchased property is outside India.
It is mandatory for the seller to satisfy all the above-mentioned conditions to avail tax exemptions. Even if one condition is not fulfilled, the seller won’t be eligible to avail the benefit of the exemption under Section 54.
Section 54F of the Income Tax Act
Under Section 54F of the Income Tax Act, individuals can avail tax exemption if they reinvest the net consideration arising from the sale of a capital asset. It is to be noted that, in case of Section 54F, the capital asset sold should not be a residential one. However, in order to be eligible for tax exemption, reinvestment should be made in the purchase or construction of a residential property.
The basic difference between these Section 54 and Section 54F of the Income Tax Act is the means of capital gain. If the capital gain is from selling a house property, then the exemption falls under Section 54, otherwise, the exemption falls under section 54F. In case of Section 54F, capital gain may come from selling assets like bonds, shares, land, gold, etc.
In order to be eligible for tax exemption under Section 54F, the capital gain should be utilized for one the following purposes:
Purchasing a new residential property one year prior to the sale of the asset
Purchasing a new residential property within two years of the sale of the said asset
Constructing a residential property within three years from the sale of the asset
It is important that you invest the entire capital gain from the sale of the assets in either purchasing a property or constructing your house. In case you invest only a part of the proceeds then only a portion of the total amount will be eligible for tax exemption.
The formula to calculate the amount eligible for tax exemption is mentioned below:
Amount to be exempt from taxation = Capital gain x Amount invested / Net consideration.
Let us have a quick look at some of the major differences between Section 54 and Section 54F.
The entire capital gains have to be invested in purchasing/ constructing a property to claim tax exemption.
To claim full exemption the entire proceeds have to be invested.
If the individual invests only a small portion of the capital gains, the remaining amount is taxable as long-term capital gains.
In case the entire proceeds are not invested, the exemption is allowed proportionately.
Exemption = Cost the new house x Capital Gains/Sale Receipts
If you sell the new property within 3 years of purchase, the tax exemption under Section 54 will be reversed. Moreover, the capital gains from the sale of the new property will be taxed as short-term capital gains.
The tax exemption under Section 54F will be reversed in the following cases:
If you sell the new property within 3 years of its purchase or construction.
If you purchase another residential house within 2 years of the sale of the asset.
If you construct a residential property other than the new house within 3 years of the sale of the original asset.
In case of Section 54F, capital gains from the sale will be taxed as long-term capital gains.
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. Before you settle for a home loan, it is recommended to compare various deals offered to you by the different financial institutions. This will help you find the best home loan for yourself. It is advisable to settle for a home loan with a competitive interest rate and low processing fee. This can help you save a large amount of money in the long run.
You can also avail various tax benefits on your home loan. Under section 80C of the Income Tax Act, you can avail tax deductions of the principal component of your home loan. Whereas section 24 of the Income Tax Act gives you the provision of availing tax benefits on the interest payable.
When you take up a home loan, it is essential that you purchase a home loan insurance policy. A home loan insurance offers protection against the risk of default in repayment in case of the death of the primary applicant. By availing a home loan insurance policy, you can make sure that your dependents don’t have to bear the obligation of repaying the home loan in your absence.
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