Section 54 of the Income Tax Act,1961
This query is : Resolved
09 April 2023
Question 1:-
Suppose an assesse has sold out a residential property (long term asset) and invested the full amount of long term capital gain u/s 54 i.e. for purchasing the new residential property.
However, the exemption under section 54 is available in respect of rollover of capital gains arising on transfer of residential house into another residential house. However, to keep a check on misutilisation of this benefit, a restriction is inserted in section 54. The restriction is in the form of prohibition of sale of the new house.
If a taxpayer purchases/constructs a house and claims exemption under section 54 and then transfers the new house within a period of 3 years from the date of its acquisition/completion of construction, then the benefit granted under section 54 will be withdrawn.
Suppose the assesse has sold out the new residential property within a period of 3 years from the date of its acquisition which was purchased u/s 54 within a period of 3 years from the date of its acquisition to save the long term capital gain tax on transfer of long term capital asset.
So as per section 54 of the income tax act the tax benefit granted u/s 54 will be withdrawn, but what if the assesse does not harm the main objective of inserting the restriction u/s 54 i.e. the misutilisation of this benefit and reinvest the sale proceeds or gain arising from the sale of new residential property purchased u/s 54 for purchasing another new residential property. Whether than also the benefit granted u/s 54 will be withdrawn?
Question 2:-
If answer to the above question is yes i.e. the benefit u/s 54 will be withdrawn than whether their is any other way by which the capital gain arising from the sale of new residential property purchased u/s 54 and sold within a period of 3 years from the date of its acquisition can be saved from tax implications?
Regards,
Shruti Agarwal
Suppose an assesse has sold out a residential property (long term asset) and invested the full amount of long term capital gain u/s 54 i.e. for purchasing the new residential property.
However, the exemption under section 54 is available in respect of rollover of capital gains arising on transfer of residential house into another residential house. However, to keep a check on misutilisation of this benefit, a restriction is inserted in section 54. The restriction is in the form of prohibition of sale of the new house.
If a taxpayer purchases/constructs a house and claims exemption under section 54 and then transfers the new house within a period of 3 years from the date of its acquisition/completion of construction, then the benefit granted under section 54 will be withdrawn.
Suppose the assesse has sold out the new residential property within a period of 3 years from the date of its acquisition which was purchased u/s 54 within a period of 3 years from the date of its acquisition to save the long term capital gain tax on transfer of long term capital asset.
So as per section 54 of the income tax act the tax benefit granted u/s 54 will be withdrawn, but what if the assesse does not harm the main objective of inserting the restriction u/s 54 i.e. the misutilisation of this benefit and reinvest the sale proceeds or gain arising from the sale of new residential property purchased u/s 54 for purchasing another new residential property. Whether than also the benefit granted u/s 54 will be withdrawn?
Question 2:-
If answer to the above question is yes i.e. the benefit u/s 54 will be withdrawn than whether their is any other way by which the capital gain arising from the sale of new residential property purchased u/s 54 and sold within a period of 3 years from the date of its acquisition can be saved from tax implications?
Regards,
Shruti Agarwal
09 April 2023
Yes, sell it after 2 years from the purchase, it will get the benefit of LTCG; so the investment in third property will overcome the LTC reversed in second property.
But if sold before 2 years, then there will be STCG, for which no investment option, need to pay tax.
But if sold before 2 years, then there will be STCG, for which no investment option, need to pay tax.
10 April 2023
Thank You Sir,
Sir, I guess the basis of your answer is based upon section 2 (42A) of the Income Tax Act, 1961 which defines short term capital asset means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer :
Provided also that in the case of a share of a company (not being a share listed in a recognized stock exchange in India), or an immovable property, being land or building or both, the provisions of this clause shall have effect as if for the words "thirty-six months", the words "twenty-four months" had been substituted.
It means in case of land if it is transferred after 24 months (i.e. 2 years) from the date of its acquisition it will be treated as long term capital asset and the long term capital gain arising upon such transfer will be eligible for investment u/s 54 of the Income Tax Act, 1961 and hence no tax implication will arise.
Question 1 – Sir whether my above guess regarding our reply is correct? If not, please provide the correct basis for your reply and please add any other basis as well if any in your opinion.
Question 2 – However, sir whether the Income Tax Department will not question the same as section 54 specifically says that the property purchased for availing the benefit of section 54 should not be transferred before 3 years of its acquisition date i.e. even if the property is transferred after 24 months(2years) but before 3 years than also the assesse has to face the tax implications. Whether Section 54 will overrule the section 2(42A) of the Income Tax Act in this case?
How would we contest the same against the income tax department if questioned by them in future?
Regards,
Shruti Agarwal
Sir, I guess the basis of your answer is based upon section 2 (42A) of the Income Tax Act, 1961 which defines short term capital asset means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer :
Provided also that in the case of a share of a company (not being a share listed in a recognized stock exchange in India), or an immovable property, being land or building or both, the provisions of this clause shall have effect as if for the words "thirty-six months", the words "twenty-four months" had been substituted.
It means in case of land if it is transferred after 24 months (i.e. 2 years) from the date of its acquisition it will be treated as long term capital asset and the long term capital gain arising upon such transfer will be eligible for investment u/s 54 of the Income Tax Act, 1961 and hence no tax implication will arise.
Question 1 – Sir whether my above guess regarding our reply is correct? If not, please provide the correct basis for your reply and please add any other basis as well if any in your opinion.
Question 2 – However, sir whether the Income Tax Department will not question the same as section 54 specifically says that the property purchased for availing the benefit of section 54 should not be transferred before 3 years of its acquisition date i.e. even if the property is transferred after 24 months(2years) but before 3 years than also the assesse has to face the tax implications. Whether Section 54 will overrule the section 2(42A) of the Income Tax Act in this case?
How would we contest the same against the income tax department if questioned by them in future?
Regards,
Shruti Agarwal
10 April 2023
Your assumption for LTCG based on holding the second property for two years or more is correct.
But the exemption claimed in first property will get reduced to the cost of Aquisition in second property, need to be corrected.
So the investment in third property will depend upon LTCG on second property, based on reduced COA.
But the exemption claimed in first property will get reduced to the cost of Aquisition in second property, need to be corrected.
So the investment in third property will depend upon LTCG on second property, based on reduced COA.
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