Exemption from Capital Gains arising on
Transfer of Residential House Property

Section 54 gives relief to a taxpayer who sells his residential house and from the sale proceeds he acquires another residential house. The detailed provisions in this regard are as under.

Basic conditions

Following conditions should be satisfied to claim the benefit of section 54.

• The benefit of section 54 is available only to an individual or HUF.
• The asset transferred should be a long-term capital asset, being a residential house property.
• Within a period of one year before or two years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house. In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

With effect from assessment year 2015-16 exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India.

Amount of exemption

Exemption under section 54 will be lower of following :

• Amount of capital gains arising on transfer of residential house; or
• Amount invested in purchase/construction of new residential house property [including the amount deposited in Capital Gains Deposit Account Scheme].

Consequences if the new house is transferred

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3 years from the date of its acquisition/completion of construction, then the benefit granted under section 54 will be withdrawn. The ultimate impact of the restriction is as follows:

• The restriction will be attracted, if after claiming exemption under section 54, the new house is sold before a period of 3 years from the date of its purchase/completion of construction.
• If the new house is sold before a period of 3 years from the date of its purchase/completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new house.

Capital Gain Deposit Account Scheme

To claim exemption under section 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer. If till the date of filing the return of income, the capital gain arising on transfer of the house is not utilised (in whole or in part) to purchase or construct another house, then the benefit of exemption can be availed by depositing the unutilised amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988 (hereafter referred as Capital Gains Account Scheme). The new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2 years or 3 years, as the case may be.

Detailed provisions of the Capital Gain Deposit Account Scheme can be viewed in Notification on the CGAS 1988 scheme.

Non-utilisation of amount deposited in Capital Gain Deposit Account Scheme

If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption under section 54 is not utilised within the specified period for purchase/construction of the residential house, then the unutilised amount (for which exemption is claimed) will be taxed as income by way of long-term capital gains of the year in which the specified period of 2 years/3 years gets over.

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