capital gains exemption

Under section 54 of the Act, an individual or a Hindu Undivided Family is allowed to reinvest long term capital gains arising from the sale of residential house ("the original asset") for purchase or construction of another residential house("the new asset"). The purchase of the new asset could be one year before or two years after the sale of the original asset and the construction could be within three years of sale of the original asset. The capital gain is required to be reinvested. If only a part of the capital gain is reinvested, only pro-rata exemption is made available

Section 54E provides for exemption of long-term capital gains if the net consideration is invested by the assessee in specified assets within a period of six months after the date of such transfer. A technical interpretation of section 54E could mean that the exemption from tax on capital gains would not be available if part of the consideration is invested prior to the date of execution of the sale deed as the investment cannot be regarded as having been made within a period of six months after the date of transfer.(specied asstes means Rural electrification bond and NHAI bond upto Rs 50 lacs)

 Dear Mr. madhavvan you need to go through these rules:

Capital Gains on sale of residential house [Section 54]

Income by way of capital gains arising to an individual and a Hindu undivided family from

the transfer of a capital asset would be exempt subject, however, to the following

conditions:

(1) The capital asset must be a building or buildings or lands appurtenant thereto and be

used as a residential house.

(2) It must be in the nature of a long-term capital asset.

(3) The income (actual or deemed) derived from the property must be chargeable to tax

as “income from house property” under section 23.

(4) The assessee must have either constructed within a period of at least three years

after the date of transfer or within one year before or two years after that date purchased

a house property for residential purposes. It may be noted that it is not required that the

new house should be used by the assessee for his own residence.

If all the above conditions are satisfied, then the capital gains will not be charged to tax as

the income of the previous year in which the transfer took place; instead the capital gains

shall be dealt with as under:

(1) If the amount of the capital gains is greater than the cost of the new asset, the

difference between the amount of the capital gains and the cost of the new asset shall be

charged as the income of the previous year. Thus, if the amount of capital gain exceeds

the amount reinvested only the difference would be chargeable to tax as capital gains.

But, if the house property so purchased or constructed is sold within three years from the

date of its purchase or completion of construction, as the case may be, the actual cost of

the asset to the assessee shall be taken as nil and consequently the whole amount

received on the second transfer shall be taxable as capital gains.

(2) If, on the other hand, the capital gain is equal to or less than the cost of the new

asset no capital gain would arise to the assessee; but the cost of the property, if sold

within the period of three years, shall be the actual cost less the amount of capital gain

which was not taxed previously.

Where the amount of capital gains for the purposes of section 54 is appropriated towards

purchase of a plot and also towards construction of a residential house thereon, the

aggregate cost should be considered for determining the quantum of deduction under

section 54, provided that the acquisition of plot and also the construction thereon, are

completed within the period specified in these sections - Circular No.667, dated 18.10.93.

Where any such house property satisfying the conditions laid down in section 54 is

compulsorily acquired under the law and additional compensation is awarded by any

Court, Tribunal or other authority, the capital gain attributable to such additional

compensation would be exempted from tax if such additional compensation is utilised by

the assessee for the purpose of purchase or construction of a house property for

residence within the specified time. The specified period for making the qualifying

investment for purposes of exemption in relation to the capital gain attributable to the

additional compensation will, in such cases, be determined with reference to the date of

receipt of the additional compensation by the tax-payer. Sub-section (2) of section 54

provides for this treatment. In such cases, if the regular assessment for the relevant year

in which the capital asset was compulsorily acquired had already been completed before

the qualifying investment attributable to additional compensation is made by the

assessee, the Assessing Officer can amend the relevant assessment order.

When the transfer is by way of compulsory acquisition and the compensation awarded by

the Government is subsequently enhanced by Court, the assessee can get exemption if

he invests such additional compensation for purchase of a residential house.

Deposit in Capital Gains Accounts Scheme 1988 : The amount of capital gain which is

not appropriated by the assessee towards the purchase or construction of new asset

before the date of furnishing the return of income under section 139 shall be deposited by

him, before furnishing such return, in an account in any such bank in accordance with the

Capital Gains Account Scheme, 1988 and such return shall be accompanied by proof of

such deposit. The amount 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.

If the amount so deposited is not utilised wholly or partly for the purchase or construction

of the new asset, the amount not so utilised shall be charged as capital gain under section

45 in the previous year in which the period of three years from the date of the transfer of

the original asset expires. The assessee shall be entitled to withdraw such amount in

accordance with the scheme.

It may be noted that amendments have been made on similar lines in sections 54B, 54D,

54F and 54G also facilitating investment by way of deposit in the Capital Gains Account

Scheme, 1988, pending utilisation of the capital gains (under Sections 54B and 54D) and

the net consideration (under Section 54F) for the purposes of acquiring the specified

assets. This scheme would obviate the need for rectification of assessment of the earlier

years.