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Understanding the Section 54 capital gains tax exemption
A capital gain is a profit gained from the sale of a home that is taxed. The house can be characterised as a short-term or long-term capital asset depending on the holding period.
If the property is held for 24 months or more, it is subject to a 20% tax rate, as well as any applicable surcharges and cess. If kept for a short period of time, such as less than 24 months, the profits are taxed at slab rates.
Let’s imagine a person needed to relocate for a variety of reasons, so he sold his previous home. He plans to buy another house with the funds from the sale.
The seller’s goal in this situation was not to make money from the sale of the old house, but to find another acceptable home. It would be a burden for the seller if he was required to pay income tax on capital gains deriving from the sale of the old residence in this scenario.
A seller can claim a tax exemption on the capital gain arising from the transfer of a residential home property under Section 54 of the Income Tax Act. Individuals and Hindu Undivided Families are the only ones eligible for this benefit (HUFs).
In addition, the transferred asset must be a long-term capital asset that has been held for at least 24 months. The taxpayer should have bought the second house within India either one year before or two years after selling the first.
Construction expenses incurred within three years of the sale of the first house would qualify if the assessee is building a residence.
The amount of capital gain on the sale of a residential property or the amount spent in the purchase or building of a new residential property will determine the amount of Section 54 exemption. Any residual funds are subject to taxation.
Only one residential house property purchased or completed in India is eligible for the deduction. If more than one house is purchased or built, only one house will be eligible for the exemption under section 54. A house purchased outside of India is not eligible for an exemption.
The rollover of capital gains resulting on the transfer of a residential house into another residential dwelling is eligible for the section 54 exemption. However, constraints have been put in place to prevent exploitation of this benefit and to ensure that it is only available to long-term buyers.
If a taxpayer purchases or develops a home and claims an exemption under section 54, the benefit provided under section 54 will be revoked if the new home is transferred within three years of its acquisition or completion of construction.