Capital gains in cases of investment in residential house [Section 54F] under Exemption of capital gains :
Eligible assessees: Individuals / HUFs
Conditions to be fulfilled
- There must be transfer of a long-term capital asset, not being a residential house.
- Transfer of plot of land is also eligible for exemption
- The assessee should –
- Purchase one residential house situated in India within a period of 1 year before or 2 years after the date of transfer; or
- Construct one residential house in India within 3 years from the date of transfer.
- The assessee should not own more than one residential house on the date of transfer.
- The assessee should not –
- purchase any other residential house within a period of one year or
- construct any other residential house within a period of 3 years from the date of transfer of the original asset.
Quantum of exemption
- If cost of new residential house ≥ Net sale consideration of original asset, entire capital gains is exempt.
- If cost of new residential house < Net sale consideration of original asset, only proportionate capital gains is exempt i.e. LTCG× Amount invested in new residential house/Net sale consideration
Illustration
From the following particulars, compute the taxable capital gains of Mr.D for A.Y.2016-17-
| Cost of jewellery [Purchased in F.Y.1990-91] | Rs 1,82,000 |
| Sale price of jewellery sold in January 2016 | Rs 11,50,000 |
| Expenses on transfer | Rs 7,000 |
| Residential house purchased in March 2016 | Rs 5,00,000 |
Solution
Computation of taxable capital gains for A.Y.2016-17
| Particulars | Rs |
| Gross consideration | 11,50,000 |
| Less: Expenses on transfer | 7,000 |
| Net consideration | 11,43,000 |
| Less: Indexed cost of acquisition (Rs 1,82,000 × 1081/182) | 10,81,000 |
| 62,000 | |
| Less: Exemption under section 54F
(Rs 62,000 × Rs 5,00,000/Rs 11,43,000) |
27,122 |
| Taxable capital gains | 34,878 |
Consequences if the new house is transferred within a period of 3 years
- Short-term capital gains would arise on transfer of the new house; and
- The capital gains exempt earlier under section 54F would be taxable as long-term capital gains.
- In the given illustration, if the new residential house is sold for Rs 6,00,000 after say, 1 year, then
- Rs 1,00,000 [i.e. Rs 6,00,000 (-) Rs 5,00,000] would be chargeable as short-term capital gain of that year in which the new house is sold.
- Rs 34,878, being the capital gains exempt earlier, would be taxable as long-term capital gains of that year in which the new house is sold.