COMPLETE GUIDE FOR CAPITAL GAIN ON TRANSFER OF RESIDENTIAL HOUSE PROPERTY U/S. 54

[anurag jain]

HERE WE DISCUSS….

1. What Is Residential House Property
2. What Is Long/Short Term Capital Assets
3. Tax Aspects Of Sale Of Residential House Property U/S 54
4. Consequences if the new house is transferred
5. Capital Gain Deposit Account Scheme
6. Non-utilisation of the amount deposited in Capital Gain Deposit Account Scheme 

1. WHAT IS RESIDENTIAL HOUSE PROPERTY?

Residential house property means all types of property which wholly use for residential purpose only. It means commercial property or land are not included under residential house property. We should be noted here that residential house property should be ready to use purpose so under construction property not covered under residential house property.    

2. WHAT ARE LONG TERM/ SHORT TERM CAPITAL ASSETS? 

Short -term capital asset 

An asset held for a period of 36 months or less is a short-term capital asset. The criteria of 36 months have been reduced to 24 months for immovable properties such as land, building and house property.

Long–term capital asset 

An asset that is held for more than 36 months is a long-term capital asset and in the case of immovable properties such as land, building and house property the holding period is more than 24 month to consider as long term capital assets.  The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier.

Some assets are considered short-term capital assets when these are held for 12 months or less.  

The assets are:

•  Equity or preference shares in a company listed on a recognized stock exchange in India.
• Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India.
• Units of UTI
• Units of an equity-oriented mutual fund, whether quoted or note. Zero-Coupon Bond  When the above-listed assets are held for a period of more than 12 months, they are considered as a long-term capital asset. 

 3. Capital Gain on sale of Residential House Property u/s 54 of Income Tax Act, 1961 

As per section 54 of Income Tax Act, 1961 the owner of a residential house property with relaxation from the capital gains tax, if the gain from the sale is used to acquire another residential house property. Owners of residential property in many cases sell their property only to purchase another property due to various reasons like moving from jobs, retirement, bigger property, change of location etc., in such a case, a property is sold by a taxpayer not for gains from the earning, but for other reasons. Hence, when a taxpayer sells a residential property and purchases another property, he or she is exempt from capital gains under Section 54 of the Income Tax Act if condition fulfils under mentioned in section 54. While claiming benefit under Section 54. The home purchased or constructed must be in India only means the property cannot purchase in abroad.  
 
Condition to avail deduction under Section 54 of the Income Tax Act

The following conditions satisfied by the taxpayer to claim benefits under Section 54 of the Income Tax Act: 

1. The taxpayer is an individual or HUF (may be resident or non-resident). Exemption under Section 54 is not available for companies or LLPs. 
2.  The asset transferred should be a long-term capital asset, being a residential house property only as discussed above. 
3. Within a period of 1 year before or 2 years after the date of transfer of the old house, the taxpayer should acquire another residential house or should construct a residential house within a period of 3 years from the date of transfer of the old house. In the case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional). If the house property purchase one year before sales of old property by taking a home loan than deduction cannot be denied as per the several tribunal judgements ruled that. 
4.  While claiming benefit under Section 54. The home purchased or constructed must be in India only means a property cannot purchase in abroad.  
5.  The taxpayer can purchase one residential house property by the sale of residential house property. In budget 2019 it is announced that assessed now can get an exemption by investing long term capital gains from the sale of house property in up to two house properties against the earlier provision of investment in one house property with same conditions. However, the capital gains on the sale of house property must not exceed ₹ 2 crores. 
6. If a taxpayer claims benefit under Section 54 of the Income Tax Act and purchases or construct a new house, he/she must hold that property for a minimum period of three years. If the taxpayer sells the property before the end of 3 years, then the benefit granted under Section 54 will be withdrawn and the taxpayer would have to pay the capital gains due on the previous transaction. 

Capital Gains Deposit Account Scheme 

Under Section 54 of the Income Tax Act, a taxpayer having long-term capital gains from the sale of a residential property can avoid the same by purchasing or constructing a residential property 1 year before or 2 years after (in case of purchase of property) or after 3 years (in case of construction of property). 

In some cases, the proceeds from the sale of the residential property would not have been invested by the taxpayer at the time of filing of income tax return (Due date of Income-tax filing as per section 139(1). In such cases, the capital gains benefit under Section 54 can be availed by depositing the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank. The new house can later be purchased or constructed by withdrawing the deposits from the account within a time frame of 2-3 years. If the deposits are not utilized within the stipulated period for the purpose of purchase or construction, the amount deposited will be taxable in the hands of the assessee.