Section 54 of ITA, 1961 : Section 54: Profit On Sale Of Property Used For Residence

Explanation using Example

Imagine Mr. Sharma sells his residential house, which he has owned for 10 years, for Rs. 50 lakhs. The capital gain from the sale is Rs. 20 lakhs. He decides to use this money to buy a new residential house to avail tax benefits under Section 54 of the Income-tax Act, 1961.

Scenario 1: Within two years after selling his old house, Mr. Sharma purchases a new house for Rs. 25 lakhs. Since the cost of the new house is greater than the capital gain, Mr. Sharma will not have to pay tax on the capital gain of Rs. 20 lakhs. However, if he sells the new house within three years of purchase, for the purpose of calculating capital gain from this sale, the cost of acquisition of the new house will be considered as nil.

Scenario 2: If Mr. Sharma buys a new house for Rs. 15 lakhs, less than his capital gain, he does not have to pay tax on the capital gain. But for the new house, the cost of acquisition will be reduced by the capital gain amount (Rs. 20 lakhs - Rs. 15 lakhs = Rs. 5 lakhs) for calculating future capital gains if sold within three years.

Scenario 3: Mr. Sharma decides to buy two smaller houses for Rs. 10 lakhs each, totaling Rs. 20 lakhs, as his capital gain does not exceed Rs. 2 crores. He can do so under the first proviso of Section 54, which allows the purchase of two residential houses in India. No tax will be levied on the capital gain.

Scenario 4: If Mr. Sharma has not purchased or constructed a new house before filing his income tax return, he must deposit the capital gain of Rs. 20 lakhs in a specified bank or institution under the Capital Gain Account Scheme before the due date of filing the return. If he does not utilize this amount for the purchase or construction of a new house within three years, it will be taxed as income in the year the three years expire.