How to avoid tax capital gains under section 54?

Such exemption is available under section 54 of the Income Tax Act for the following:

The property sold is a residential house property

The asset sold is a long-term capital asset

The property purchased should be a residential house property

The purchase should be made before one year from the date of transfer of the old house property or within a period of two years, the taxpayer should acquire or construct the property within a period of three years from the date of transfer of the old house

The property purchased/constructed should be in India

Exemption under section 54 can be claimed only for the property purchased/constructed of a residential house. However, section 54 has been amended, with effect from 1st April 2020 and the benefit of exemption is available in respect of investment made in two residential house properties if the amount of long-term capital gain does not exceed 2 crores. This option can be exercised by an assessee only once in his lifetime.

For example, Nitin had residential house A for 10 years. He bought a new residential house B on 1st February 2020 of value 1 crore. Nitin sold house A on January 2, 2021 for 100 million. The capital gain (CG) on this sale was 2 crores. Nitin bought a house worth C on 1st March, 2022 1 crore. They are of the view that exemption can be claimed in respect of capital gains arising on transfer of house A because houses B and C are purchased either one year earlier or within the time frame of two years later. Also, capital gains . is less than 2 crore and hence he will be able to exercise the once in life option of claiming deduction by investing capital gains in two houses. His understanding in this matter is correct. It is pertinent to note that CG will be exempted to the extent of CG or amount invested in purchase/construction of second house, whichever is less.

It is interesting to know what happens if a new residential property purchased or constructed is transferred within a period of three years from the date of acquisition to claim deduction under section 54. The claimed exemption will be withdrawn. The amount claimed as exemption earlier will be deducted from the cost of acquisition of the new house property.

Suppose, Siddharth has two house property L, M for the last 8 years. He sold the house to L for Made a CG of 1.75 crores in September 2020 70 lakhs. He bought another house property N in December 2020 1 crore. He filed ITR in July 2021 and claimed exemption for entire capital, i.e. 70 lakhs.

Now, in August 2021, he has converted house N to . sold for 1.05 crores. Thus, the Coast Guard will 5 lakhs. He does not have any other income during the year. They hold that they will not be liable to pay any tax on account of exemption under section 87A. This belief of Siddhartha is not correct; He sold the house property before the completion of 3 years and claimed exemption under section 54 70 lakhs. Therefore, for the purpose of computing short-term capital gains, the earlier exemption 70 lakh will be deducted from the cost of acquisition of 1 crore. The cost of acquisition for income tax purpose will be 30 million ( 1 crore less 70 lakhs). short-term capital gain will be 75 lakhs (sale price 1.05 crore less newly calculated cost of acquisition 30 million).

Suppose, Rahul sold house property A in July for 10 crore and earned a long-term capital gain of 4 crores. House B has been bought for 5 crore in the name of wife in August. Can he claim exemption under section 54? In a recent judgment, Bhagwan Swaroop Pathak v ITO, Delhi Bench of Income Tax Appellate Tribunal and CIT (A) v Kamal Wahal 351 ITR 4, Delhi High Court has held that a person is eligible for CG exemption if he invests Will happen. Entire LTCG for investment in any other asset in the name of spouse or other relative.

Nitesh Buddhadev is the founder of Nimit Consultancy.