How to Save Capital Gain on Sale of Residential Property?

Updated: Jan 31, 2019

Capital Gain on Sale of Residential Property (Section 54)

Capital Gain on Sale of Residential Property
Capital Gain on sale of Residential Property (Section 54)

In India income is chargeable under the head Capital Gains when there is an Income arising from Sale or Transfer of "Capital Asset". Today we are going to go through the Capital Gain arising on Sale or Transfer of Residential Property such as Flat, Row House, Bungalows etc, and how to save capital gain tax. We will go through all the provisions in a very simple term.


Lets understand what are the capital asset by some examples.


Following are some of the example of capital asset:

Land & building (Commercial Land, Godown, Shops, Garage etc)
House Property (Residential flat, Row houses etc)
Vehicles, Patents, Trademarks, Leasehold rights,Machinery
Having rights in or in relation to an Indian company. It also includes rights of management or control or any other legal right (Shares, Debentures etc)
Jewelry, archaeological collections, drawings& paintings, Sculptures or any other work of art

Following are not capital asset:

Stock held for Business
Personal goods such as clothes, furniture held for personal use
Agricultural Land in Rural area in India (Rural area is as defined under Income Tax Act)
6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government and Special bearer bonds and gold deposit bonds issued under the gold deposit scheme (1999)

Long Term Capital Asset vs. Short Term Capital Asset

Long Term Capital Asset Vs. Short Term Capital Asset

I. Long Term Capital Asset

  • In case of movable property, it is considered as long term when it is held by an assessee for at least 36 months.

  • In case of Immovable Property and Certain Listed securities, it is to be considered as Long Term when it is held by an assessee for atleast 24 months.

Capital gain on such assets are considered as Long Term capital gain

II. Short Term Capital Asset

  • In case of  movable property, it is considered as short term when it is held by an assessee for less than 36 months.

  • In case of immovable property, it is considered as short term when it is held by an assessee for less than 24 months.

Capital gain on such assets are considered as Short Term capital gain.

Note:

(From FY 2017-18 onwards, the criteria of holding period needs to be at least 24 months instead of 36 months for immovable properties like land, building, and house property to be considered as long-term capital assets.

For example, if an assessee sells a house property after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March 2017.

However, this 24 months clause is not applicable to movable property such as jewellery, Debt Oriented Mutual funds etc. They will be classified as a Long-term capital asset if held for more than 36 months as earlier).

Capital Gain on Sale of Residential Property:


Section 54 of the Income Tax Act deals with the provision related to relief to seller on Sale  of Residential property:

A seller of a residential property can get relief from tax under this provision by investing the capital gain on  sale proceeds to acquire or construct another residential property. 

So, now question arises, what are the eligibility criteria for availing this benefit?


  • This benefit is available to Individual or HUF only. Thus, Company, LLP, Partnership Firm or any other type of entity are not eligible for this deduction.

  • House Property sold should be long term in Nature as per Income Tax Act (Discussed in later part of this topic).

  • New property shall be acquired or constructed in India Only.

  • If more than one house property is purchased or constructed, then only one property will be eligible for purpose of exemption.

  • You should not own more than one residential house at the time of sale of the old property.


Time Period for acquisition or construction of new residential property to avail this relief:

Income Tax Act specifies time period in which a new property should be acquired. Accordingly, a seller of property shall acquire a new residential property within a period of one year before sale or two years after the sale of old residential property. In case seller wants to construct a new residential property then he shall construct the same within three years from the date of sale.

What if person fails to Purchase new property while filing Income Tax Return or within 1 year from the date of sale? If a person is unable to purchase the new residential property within one year from date of transfer or due date for filing of return whichever is earlier, then benefit under Section 54 can be availed by depositing the un-utilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank. The new house can later be purchased or constructed by withdrawing the deposits from the account within a time frame of 2 years (for purchase) 3 years (for construction). If the deposits are not utilized within the stipulated period for the purpose of purchase or construction, the amount deposited will be taxable.

What is the Maximum allowable tax exemption on capital gain?

The maximum allowable exemption on capital gain will be lower of:

  • Capital gains arising on transfer of residential house. or

  • Investment made in purchase or construction of a new residential house property. Hence, the balance capital gains (If any) will be taxable.

Restriction on Sale of New Property:

Income Tax Act restricts a person to sale or transfer new property, that is if a person has claimed benefits under Section 54 during the sale and purchase of new residential property, then he/she if transfers new property within a period of 3 years from the date of its acquisition/completion of construction, then the benefit availed under section 54 will be withdrawn and the person will be liable to capital gain tax.


What if New Property is sold within period of 3 years as specified above?

If a person is selling out new property within period of 3 years on which relief under section 54 was availed, then in such case, cost of new property will be reduced by capital gain benefit availed on old property, while calculating short term capital gain. Can I take benefit of Improvement cost made to property?

Yes, an assessee can reduce the cost of improvement from sale consideration, however in case of Long Term Capital Gain such cost of Improvement shall be calculated considering the cost inflation Index. What is Cost Inflation Index?

Cost Inflation Index is declared by government every year which is used to  adjust prices based on a standard index so as to factor in the inflation rate also while calculating profits earned on sale of assets. Indexation is important because prices generally do not remain flat and tend to vary with time; hence, computing profits based on the original price of an asset is not an accurate measure of profit. Indexation takes into account inflation too and gives us a more reasonable figure for long-term capital gains. How to calculate a long term capital gain? Calculating Long Term Capital Gain is quiet complex, here's how to calculate long term capital gain.

How to calculate short term capital gain?

Calculating short term capital gain is quiet simpler than long term capital gain. Here's how to calculate short term capital gain.

Some Examples of calculating capital gain on sale of residential property:

Example 1: Mr.Rakesh purchased a residential house in June, 2012 for Rs.5,00,000 and sold that house on 20th July, 2017 for Rs. 9,50,000. Capital gain arising on sale of the house amounted to Rs. 1,50,000. Out of the sale proceeds, he bought another residential house for Rs. 12,00,000. This house was purchased in December 2017. What will be the amount of exemption under section 54?

Cost Inflation Index for FY 2012-13 was 200 and for FY 2017-18 was 272


So Capital gain will be calculated as follows:

Since cost of new property is more than amount of capital gain, no tax will be payable on capital gain and the capital gain exemption will be Rs.2,70,000


Example 2:

What if in the above example Cost of new property is Rs.2,25,000/-?

So Capital gain will be calculated as follows:

Since cost of new property is less than the capital gain, the capital gain exemption will be Rs.2,25,000/-

Tax on balance capital gain @ 20% i.e 45,000 x 20% = Rs.9,000/-

Example 3:

What if in example 1 the new property was sold in FY 2018-19 at Rs.18,00,000/-  from the date of purchase on which capital gain benefit was availed?

In such a case short term capital gain will arise in the year in which the property is sold, and cost of new asset will be reduced by the capital gain benefit availed earlier.

Tax on Short Term Capital Gain shall be calculated at slab rates for the year in which they arise


Example 4:

What if in example 2, where new property was purchased for Rs.2,25,000 the new property was sold in FY 2018-19 at Rs.10,00,000/-  from the date of purchase on which capital gain benefit was availed?

In such a case short term capital gain will arise in the year in which the property is sold, and cost of new asset will be reduced by the capital gain benefit availed earlier.

Tax on Short Term Capital Gain shall be calculated at slab rates for the year in which they arise.

So this was all you need to know about capital gain on sale of residential property.


About an Author:

Amish Maknojia is a CA student and enthusiastic entrepreneur. He is the founder of iDeal ConsulTax and has an experience of over 5 years in Direct and Indirect tax. He has achieved a milestone in establishing an identical consultancy firm, with a redefined consultancy approach in the field of taxation. They aim at fulfilling the business needs of a client in a systematic and organised manner so as to ensure hassle free fulfillment of busniess needs.

iDeal ConsulTax is Mumbai based Tax Consultancy firm involved in Tax Consultancy and Compliance services needs of business. It is involved in providing services such as consultancy in Income Tax, Goods& Service Tax (GST), Company Formation, LLP Formation, Partnership Registration and so on. It aims at providing service with no follow up culture, and its motto is "You Earn, We Manage". So client can focus on business without worrying about the compliance

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