What are the benefits of an asset being classified as a long-term capital asset?
The primary benefit of an asset being termed as a long-term capital asset is that the assessee is eligible for the benefit of indexation. Moreover, certain exemptions are suitable only for long-term capital assets.
Exemption under Section 54Under Section 54 of the IncomeTax Act, an individual or HUF selling a residential property can avail tax exemptions from Capital Gains if the capital gains are invested in purchasing or constructing the residential property.
Under Section 54 of the IncomeTax Act, an individual or HUF selling a residential property can avail tax exemptions from Capital Gains if the capital gains are invested in purchase or construction of residential property.
Taxpayers such as partnership firms, LLP's, companies or any other association or body cannot claim tax exemption under section 54. The conditions that need to be satisfied to avail the benefit of the said section are as follows:
- The asset must be classified as a long-term capital asset.
- The asset sold is a Residential House, and income from such a house should be chargeable as Income from House Property.
- The seller should purchase a residential house either one year before the date of sale/transfer or two years after the date of sale/transfer. If the seller is constructing a home, the seller has an extended time, i.e. the seller will have to build the residential house within three years from the date of sale/transfer. In case of compulsory acquisition, will determine the period of purchase or construction from the date of receipt of compensation (whether original or additional payment)
- The new residential house should be in India, and the seller cannot buy or purchase a residential home abroad and Exemption.
The above conditions are cumulative. Hence, even if one requirement is not fulfilled, the seller cannot avail of the benefits exemption under Section 54.
With effect from Assessment Year 2020-21 corresponding to FY 2019-20, a capital gain exemption is available to purchase two residential houses in India. Howe Exemption is subject to the capital gain not exceeding Rs 2 crore. An Exemption is available only once in the lifetime of the seller.
What is the Exemption available under Section 54 of the Income-tax Act?
The amount of Exemption under Section 54 of the Income Tax Act for the long-term capital gains will be the lower of:
- Long Term Capital gains arising on transfer of the residential house, Or
- The investment is made in the purchase or construction of a new residential house property. Hence, the balance capital gains (If any) will be taxable.
- Mr X sells his villa(house property) for Rs 45,00,000/-
- With the proceeds of the sale, he purchases another villa for Rs 20,00,000/-
- Capital Gains will be computed as follows
|Capital gain on transfer of residential house||45,00,000.00|
|Less: Investment made in residential house property||20,00,000.00|
|Balance – Capital Gains||25,00,00 Exemption will be lower of the Capital Gains (Rs 45,00,000) or investment in new property (Rs 20,00,000) Exemption will be Rs 20,00,000.|
What are the provisions relating to the transfer of property after claiming benefit under Section 54?
If the new house is sold within three years from the date of purchase or construction, Exemption claimed earlier under section 54 shall be indirectly taxable in the year of sale of the new house property. Let's consider two scenarios when the new house is sold within three years from the date of purchase or construction:
Case 1: The cost of the new house purchased is less than the capital gains computed on the sale of the original home.
Generally, when a house is sold, the profit is considered capital gains. However, when the new home is sold within three years from the date of purchase or construction, the acquisition cost will be regarded as Nil. Hence, there will be an indirect increase in taxable capital gains.
Mr Y sold residential house property in May 2015, and the capital gains amounted to Rs. 30,00,000/- In June 2015, Mr Y purchased a residential house property worth Rs. 18,00,000/-
Mr Y sold the new residential house property (Purchased in June 2015) in December 2016 for Rs. 35,00,000/-
Based on the facts mentioned above, let's compute the taxable capital gains for Mr Y . FY 15-16 (Property sold in May 2015)
|Capital gain on transfer of residential house||30,00,000.00|
|Less: Investment made in residential house property||18,00,000.00|
|Balance – Taxable Capital Gains In FY 15-16||12,00,000.00|
FY 16-17 (Property sold in December 2016)
|Consideration for transfer (Sale Consideration)||35,00,000.00|
|Less: Cost of Acquisition||NIL|
|Balance – Taxable Capital Gains In FY 16-17||35,00,000.00|
As the new property for which deduction was claimed under Section 54 was sold in December 2016 (i.e. within three years from the date of acquisition), its purchase cost was considered NIL.
As a result, the entire sale consideration was considered as capital gains. Had the property been sold after three years, i.e. after June 2018, then in such case, the cost of acquisition would be available as a deduction, and capital gains would reduce.