Exemptions from CapitaL Gain - Taxation | Income Tax for assessment (Inter Level) PDF Download

Exemptions from CapitaL Gain - Taxation

conditions

a. Only individual or HUF can claim exemption under section 54. (R / NR / IC / FC)

b. The asset which is transferred should be a residential house property being a long term capital asset. It includes buildings or land appurtenant thereto which is chargeable under the head ‘Income from House Property’.

c. New residential house property should be purchased or constructed in india within time allowed before or after the “Zero Date”.  

Note 1: Zero Date is the date of sale of original residential house property. Let us see the time limit.

- A new RHP should be purchased within 1 year before the ‘zero date’.

- A new RHP should be purchased within 2 years from the ‘zero date’.

- A new RHP construction should be completed within 3 years from the ‘zero date’.

In short  (1 year purchase <--zero date --> 2 years purchase or 3 years construction)

e.g. The date of sale of original residential house 6-10-2016. Find out the date by which he should purchase or construct a new residential house to claim exemption u/s 54.

It means to claim exemption a new house can be purchased on or after 7-10-2015 or by 5-10-2017 8however construction of new house should be completed on or after 6-10-2016 but by 5-10-2019.

d. Deposit scheme u/s 54(2) : Where the amount is not so utilised for purchase or construction of new residential house before the due date of furnishing of return, it shall be deposited by him on or before the due date of furnishing of return in the deposit account as per Capital Gain Account Scheme, 1988. Such deposited amount is deemed to be cost of acquisition of new asset on which exemption u/s 54 be claimed.

Note 1: Due date of furnishing of return for the AY 2017-18 is either 31-7-2017 or 30-9-2017 as the case may be.

Note 2: If assessee plans to purchase / construct a new residential house after the due date of furnishing of return then he should deposit the amount in a Scheduled Bank on or before the due date of furnishing of return and such deposited amount should be utilised on or before 5-10-2018 or 5-10-2019 as the case may be for purchase or construction of new residential house property.

Note 3: Assessee can claim exemption of only 1 residential house under section 54.

Memory technique: ‘Zero date’ is seen only when house is purchased or constructed and due date of furnishing of return is seen only when amount is deposited in a Scheduled Bank.

Computation of Amount of Exemption

Consequences 1: Consequences of Non-Utilisation of deposited Amount with in  2 / 3 years from the zero date

a. The deposited amount should be utilised either to purchase or construct a new residential house property within 2 / 3 years from the zero date, otherwise exemption claimed on the basis of amount deposited shall stand withdrawn or taken back.

b. Withdrawal of exemption shall be treated as LTCG which shall be chargeable to tax after the expiry of 3 years from the zero date. Its computation is shown below. 

Computation of LTCG

Note 1: The remaining unutilised amount can be withdrawn at any time after the expiry of 3 years from the ‘zero date’.

Consequences 2: Consequences if new residential house is transfered with in 3 years from the date of its acquition

When a new residential house is transferred within 3 years from the date of its acquisition, then there arises two types of gains:

a. STCG arises on transfer of new residential house, since house is transferred within 3 years from the date of its acquisition.

b. A penalty gain meaning thereby the amount of capital gain exempted earlier for the new residential house shall stand withdrawn. We call it penalty gain since withdrawal of LTCG exemption is converted into STCG.

See below how.

Computation of STCG

Other Points

a. zero date in case where property is compulsorily acquired: Zero date shall be the date when part or full initial compensation is received. In case of enhanced compensation the date of receipt of enhanced compensation shall be the zero date. [S 54H]

b. taxability of unutilised amount on the death of the owner of the property: The unutilised deposit amount under the Capital Gains Account Scheme, 1988 in the case of an individual who dies before the expiry of the stipulated period cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.

P1: Compute capital gain of Mr. X for the AY 2017-18. Long term capital gain arising from the sale of residential house property ₹ 7,00,000 on 1-2-2017. Due date of furnishing of return is 31-7-2017.

Solution

To claim exemption u/s 54, he should invest in new RHP within zero date which is 2-2-2016 <--- 1 -2-2017 ---> 31-1-2018 (P) or 31-1-2020 (C).

Computation of Capital Gain for AY 2017-18

(B) What if House 2 is purchased instead of construction.

Ans: 1,53,000; 2,80,000.

Solution

Computation of Capital Gain for AY 2020-21

Note : House 1 is purchased after 2 years from the zero date therefore exemption u/s 54 is not available. Also only 1 house is eligible for exemption.

P3: Continuing from the preceding illustrations Mr. X sells house 2 on 10-1-2023 for (a) Rs 1,50,000 (b) Rs 27,000 Compute capital gain chargeable to tax.

Solution

P5 : Compute capital gain from the following informations.