Section 54 of the Income Tax Act provides exemption on long term capital gains from the sale of residential property if the proceeds from such sale are reinvested in purchasing or constructing another residential property within a specified time frame. Section 54F exemption is allowed only on long-term capital gains.
Budget 2024 Updates
Key changes include a reduced tax rate for long-term capital gains in specific scenarios, the removal of indexation benefits (except for certain cases involving land and buildings), and a simplified holding period. Most of these new capital gains provisions will be effective for transfers made on or after 23 July 2024.
| Capital Gains Category | New Tax Rate | Key Changes |
|---|---|---|
| Long-term Capital Gains (LTCG) | 12.5% |
|
| Short-term Capital Gains (STCG) | 20% |
|
| Change in Holding Period | 24 months | – Holding period reduced from 36 months to 24 months for units of unlisted business trusts, debt mutual funds (other than Specified Mutual Fund), and gold to qualify as long-term assets. |
What is Section 54 of the Income Tax Act, 1961?
Firstly, let us understand which portion of the income is taxable on sale of the property. Is it the entire amount received on sale of property?
The answer is NO.
In simple words, it is only the profit earned by the individual on sale of the property that is taxable. Profit is the difference between the sale price and the cost of the asset.
A sale of a residential house is a sale of a capital asset, and the profit gets taxed as a capital gain.
The definition of capital asset under section 2(14) of the Income Tax Act includes property of any kind movable or immovable, tangible or intangible held by the assessee for any purpose.
As per the income tax act, for the purpose of capital gains, assets are classified into 2 types depending on the holding period of the asset:
- Short-term capital asset
- Long-term capital asset
What are the Different Types of Capital Assets Under Income Tax?
Short-term capital assets-
Capital assets that the individual holds for not more than 36 months are called short-term capital assets. The gains from selling these assets are called short-term capital gains.
Long-term capital assets-
The assets the assessee holds for more than 36 months are called long-term capital assets. The gains from selling these assets are called long-term capital gains.
If unlisted shares, land, or other immovable property are held for more than 24 months, it is considered a long-term capital asset.
The following assets shall be treated as long-term capital assets if they are held for more than 12 Months:
- Listed securities
- Units of Equity oriented fund
- Zero-coupon bond
For Section 54 of the Income Tax Act, the house property should be held for more than 24 months to consider an asset as a long-term capital asset.
Who is Eligible to Avail of the Exemption Under Section 54?
- Only individuals or HUFs are eligible to claim this benefit. The companies cannot reap the benefits of this section.
- The house property the taxpayer is selling should be a long-term capital asset.
- The property that is to be sold should be a residential house. Income from this property should be charged under the head income from the house property.
- The new residential house property should be purchased either one year before the date of transfer or two years after the date of sale or transfer. In the case of constructing a new house, the individual is given an extended time period to construct a house, i.e., within three years of the date of transfer or sale.
- The house property that is bought should be in India.
LTCG and STCG Rates in 2023-24 and 2024-25 - Comparison
Budget 2024, announced on 23rd July 2024, brought about certain changes in the long-term and short-term capital gains tax rates and holding periods. Given below is a table showing the comparison between the capital gains tax rates in FY 23-24 and FY 24-25.
Taxation for mutual funds
| Product | Before | After | ||||
|---|---|---|---|---|---|---|
| Period of holding | Short Term | Long Term | Period of holding | Short Term | Long Term | |
| Equity oriented MF units | > 12 months | 15.00% | 10.00% | > 12 months | 20.00% | 12.50% |
| Specified Mutual funds which has more than 65% in debt | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | Slab rate |
| Equity FoFs | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
| Overseas FoF | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
| Gold Mutual Funds | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
How to Calculate Capital Gain Exemption Available Under Section 54?
Section 54 of the Income Tax Act allows the lower of the two as an exemption amount for a taxpayer:
- Amount of capital gains on transfer of residential property or
- The investment made for constructing or purchasing new residential property
The balance amount (if any) will be taxable as per the Income Tax Act.
With effect from Assessment Year 2024-25, the Finance Act 2023 has restricted the maximum exemption to be allowed under Section 54. In case the cost of the new asset exceeds Rs. 10 crore, the excess amount shall be ignored for computing the exemption under Section 54.
For Example, Mr. Anand sells his house property and earns a capital gain of Rs. 35,00,000. With the sale amount, he purchased a new house for Rs 20,00,000. The exemption under Section 54 will be the lower amount of Rs 20,00,000.
The capital gains that are liable for taxation will be the balance of both, which is Rs 15,00,000 ( 35,00,000-20,00,000).
FAQs
Is the full amount received from the sale of property taxable?
No, the amount of sale consideration is not taxable. The amount of capital gain, which is calculated as per the prescribed calculation, is taxable if no exemptions have been claimed.
When does the taxpayer benefit under section 54?
When the assessee purchases a new residential house property within one year before or two years of the sale of the original house property or constructs a new house property within three years of the sale of the old property, he or she is liable to get benefit from the exemption under section 54.