Capital Gains on sale of residential house [Section 54] under Exemption of capital gains :
Eligible assessees – Individual & HUF
Conditions to be fulfilled
- There should be a transfer of residential house (buildings or lands appurtenant thereto)
- It must be a long-term capital asset
- Income from such house should be chargeable under the head “Income from house property”
- One residential house in India should be –
- purchased within 1 year before or 2 years after the date of transfer (or)
- constructed within a period of 3 years after the date of transfer. Quantum of Exemption
- If cost of new residential house ≥ Capital gains, entire capital gains is exempt.
- If cost of new residential house < Capital gains, capital gains to the extent of cost of new residential house is exempt
Examples
- Example 1 – If the capital gains is Rs 5 lakhs and the cost of the new house is Rs 7 lakhs, then the entire capital gains of Rs 5 lakhs is exempt.
- Example 2 – If capital gains is Rs 5 lakhs and cost of new house is Rs 3 lakhs, then capital gains is exempt only upto Rs 3 lakhs. Balance Rs 2 lakhs is taxable @ 20%. Consequences of transfer of new asset before 3 years
- If the new asset is transferred before 3 years from the date of its acquisition, then cost of the asset will be reduced by capital gains exempted earlier for computing short-term capital gains.
- Continuing Example 1, if the new house was sold after 2 years for Rs 8 lakhs, then short term capital gain chargeable to tax would be –
Particulars Rs Rs Net Consideration 8,00,000 Less: Cost of acquisition 7,00,000 Less: Capital gains exempt earlier 5,00,000 2,00,000 Short term capital gains chargeable to tax 6,00,000
Illustration
Mr. Cee purchased a residential house on July 20, 2012 for Rs 10,00,000 and made some additions to the house incurring Rs 2,00,000 in August 2012. He sold the house property in April 2015 for Rs 20,00,000. Out of the sale proceeds, he spent Rs 5,00,000 to purchase another house property in September 2015.
| Financial year | Cost Inflation Index |
| 2012-13 | 852 |
| 2015-16 | 1081 |
What is the amount of capital gains taxable in the hands of Mr. Cee for the A.Y.2016-17?
Solution
The house is sold before 36 months from the date of purchase. Hence, the house is a short term capital asset and no benefit of indexation would be available.
| Particulars | Rs |
| Sale consideration | 20,00,000 |
| Less: Cost of acquisition | 10,00,000 |
| Cost of improvement | 2,00,000 |
| Short-term capital gains | 8,00,000 |
Note: The exemption of capital gains under section 54 is available only in case of long-term capital asset. As the house is short-term capital asset, Mr. Cee cannot claim exemption under section 54. Thus, the amount of taxable short-term capital gains is Rs 8,00,000.