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Analysis of recent amendment in Section 54

Section 54 is applicable when an individual/HUF sells a residential property and buys another residential property, then he will be eligible for claiming Exemption u/s Section 54.

Applicability

If the newly purchased or constructed house is sold before 3 years from the date of capital gain on sale, then the exemption claimed earlier under section 54 shall be taxable in the year of sale.

1. This Section is applicable only to Individual or HUF.

2. The Asset sold should be a Residential property.

3. The seller should purchase residential property either 1 year before or after 2 years after selling/transfer. 

4. In case of Construction of property, the seller has to construct the residential property within 3 years from the date of sale/transfer.

If the newly purchased or constructed house is sold before 3 years from the date of capital gain on sale, then the exemption claimed earlier under section 54 shall be taxable in the year of sale.

5. The new Residential property should be in India.

Maximum Exemption Limit

The Maximum amount of exemption available under this section will be

a. Capital gains on transfer of residential house.

                                       Or

b. Investment made in purchase or construction of new residential house property.

whichever is lower.

Amendment in Budget 2019

Earlier this exemption was applicable only for investment made in one residential property in India, this has been amended in Budget 2019, where the tax payer can invest in two residential properties, but the capital gain should not exceed Rs. 2 crore.

For Example: Mr X purchased a residential property in the year 2005-06 for Rs. 10 lakhs. The same house property was sold for a capital gain of Rs. 80 Lakhs in FY 2019-20. He invested the gain in two house properties of Rs. 40 lakh each. Then he is eligible to claim exemption of Rs. 80 lakhs and capital gain will be nil. If the capital gain on selling the property is more than 2 crore, then he can claim exemption of Rs. 40 lakhs only as the gain is crossing 2 crore and thus the exemption is limited to one property.