Exemption from Capital Gain under Income Tax on Profit on Sale of Property used for Residence
Section 54 of the Income Tax act deals with the exemption from capital gain arising on sale of property used for residential purpose (Self Occupies or Rented) by Individual and HUF.
Amount of Exemption or Exemption from capital Gain tax Depends on amount of reinvestment made by the Individual and HUF.
Exemption is only allowed when Investment is done in
1) Purchase of another residential property within period of 1yr or 2yrs from the transfer of house property .i.e 1yr old investment or investment within 2yrs
2) In case of property is constructed, then within 3yrs from the date of selling of house property
but Individual can’t sell new residential property within 3 yrs from the date of acquisition or construction and in case if new property is sold then cost of acquisition will be reduced by the capital gain originally exempted from Income Tax.
Amount of Deduction : Calculation of Exemption Amount
1) If Cost of new property is higher them then capital gain amount then entire capital gain will be exempted from Income Tax
2) If Cost of property is less than capital gain then such cost of acquisition will be allowed as exemption from capital gain
In case Assessee is not able to utilize the amount in first year before filing of Income tax return or before Due date date of Filing Income Tax Return under section 139(1) of Income Tax Act then assesse should deposit the un-utilized amount in Capital Gain account of Schedule Bank authorised to open such account.
Reference Section 54 of Income Tax Act
54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset) the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or
(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.
(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—
(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.
Explanation.—[Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.
Case Laws Reference
Sec. 54 Income tax Act, 1961—Capital gain—while dismissing the appeal of the revenue High Court of Karnataka held that:—”On a site measuring, the assessee had a residential premises. Under a joint development agreement, she gave that property to a builder for putting up flats. Under the agreement eight flats are to be put up in that property and four flats representing 48 per cent is the share of the assessee and the remaining 52 per cent representing another four flats is the share of the builder. So, the consideration for selling 52 per cent of the site is four flats representing 48 per cent. All the four flats are situating in a residential building. These four residential flats constitute “a residential house” for the purpose of s. 54. Profit on sale of property is used for residence. The four residential flats cannot be construed as four residential houses for the purpose of s. 54. It has to be construed only as “a residential house” and the assessee is entitled to the benefit accordingly.” CIT & Anr. Vs. Smt. K.G. Rukminiamma  17 ITCD 21 (Karn)