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All About Section 54 for Income tax

all-about-section-54-for-income-tax

 

Section 54: Profit on sale of property used for residence

Applicability:

For assessee being Individual or Hindu Undivided Family which has earned a long term capital gain on sale of a residential house property and has then

  • purchased a residential house in India one year before such sale; or
  • purchased a residential house in India within 2 years after such sale; or
  • constructed a residential house in India within 3 years after such sale

Treatment:

Case A: Capital Gain on sale is greater than Cost of Residential House purchased or constructed

The excess amount shall be treated as capital gain under Section 45. Also, if in case the new house property is sold within 3 years from its purchase or construction, the cost of acquisition for the purpose of computing capital gain shall be Nil.

Case B: Capital Gain on sale is less than or equal to Cost of Residential House purchased or constructed

The capital gain on original asset shall not be charged under Section 45. Also, for computing capital gain if in case the new house property is sold within 3 years from its purchase or construction, the cost of acquisition shall be reduced by the amount of capital gain on original asset.

Option for Deposit to Capital Gains Accounts Scheme

In case the assessee does not use the amount of capital gain to acquire a residential house one year before sale or before the due date as per provisions of Section 139(1), it may deposit such amount in the specified banks which can be used for the purposes as mentioned by Central Government in the Official Gazette. The proof of such deposit shall be enclosed along with return filing. The amount already utilized and amount deposited shall together form the cost of the new asset.

In case the amount is not used for purchase or construction within 3 years from the date of transfer of original asset, the amount deposited shall be taxable under the head ‘capital gain’ under Section 45.

Section 54B: Profit on sale of Agricultural Land

Applicability:

For assessee being Individual or Hindu Undivided Family which has earned capital gain on sale of land which was in use for agricultural purposes by parents of the individual or the individual itself or Hindu Undivided Family and has then purchased an agricultural land for agricultural purposes within 2 years of original sale.

Treatment:

Case A: Capital Gain on sale is greater than Cost of Agricultural Land purchased

The excess amount shall be treated as capital gain under Section 45. Also, if in case the new land is sold within 3 years from its purchase, the cost of acquisition for the purpose of computing capital gain shall be Nil.

Case B: Capital Gain on sale is less than or equal to Cost of Agricultural Land purchased

The capital gain on original asset shall not be charged under Section 45. Also, for computing capital gain if in case the new land is sold within 3 years from its purchase, the cost of acquisition shall be reduced by the amount of capital gain on original asset.

Option for Deposit to Capital Gains Accounts Scheme is available.

Section 54D: Gain on Compulsory Acquisition of Land & Building

Applicability:

For any assessee whose land or building or right in land or building has been compulsorily acquired under any law which was a part of the industrial undertaking in which the assessee is engaged for a period not less than 2 years before such acquisition and the assessee has within next 3 years from such compulsory acquisition constructed or acquired land or building or right in land or building for the purpose of re-establishment of business of previous undertaking or setting up a new industrial undertaking.

Treatment:

Case A: Capital Gain on sale is greater than the cost of new asset

The excess amount shall be treated as capital gain under Section 45. Also, if in case the new asset is sold within 3 years from its purchase, the cost of acquisition for the purpose of computing capital gain shall be Nil.

Case B: Capital Gain on sale is less than or equal to cost of new asset

The capital gain on original asset shall not be charged under Section 45. Also, for computing capital gain if in case the new land is sold within 3 years from its purchase, the cost of acquisition shall be reduced by the amount of capital gain on original asset.

Option for Deposit to Capital Gains Accounts Scheme is also available.

Section 54EC: Capital gain not chargeable for investment in specified securities

Applicability:

For any assessee who has earned a long term capital gain on sale of land or building or both and the assessee has within 6 months invested whole or part of capital gain in long term specified asset.

Long term specified asset means any bond redeemable after 3 years, issued by

  1. National Highway Authority of India (NHAI); or
  2. Rural Electrification Corporation Limited (RECL); or
  3. Any other bond specified by Central Government in this behalf
    (for example, National Housing Bank, NABARD, SIDBI)

The investment must be made on or after 01st April 2007. The amount of investment in the year of transfer and subsequent year, combined shall not exceed Rs. 50,00,000.

Treatment:

Case A: Cost of specified asset is more than or equal to capital gain on original sale

The excess amount shall be treated as capital gain under Section 45. Also, if in case the new house property is sold within 3 years from its purchase or construction, the cost of acquisition for the purpose of computing capital gain shall be Nil.

Case B: Cost of specified asset is less than capital gain on original sale

The capital gain shall be reduced proportionately by the amount as such capital gain bears to cost of specified investment. In other words, the following formula shall be used:

If an assessee claims deduction under this section, it would not be allowed any deduction for the same under section 88 or section 80-C.

If the specified asset is transferred or converted into money within 5 years of its acquisition, the amount earlier allowed as deduction shall be taxable in the year of such transfer or conversion under the head ‘capital gain’. Any loan or advance on security against such specified securities will have the same effect as transfer or conversion.

Section 54F: Investment in Residential House Property from Capital Gains in specified assets

Applicability:

For assessee being Individual or Hindu Undivided Family which has earned a long term capital gain on sale of any capital asset other than residential house property and has then

  • purchased a residential house in India one year before such sale
  • purchased a residential house in India within 2 years after such sale
  • constructed a residential house in India within 3 years after such sale

The provisions of Section 54F shall not be applicable if assessee:

  • owns more than one residential house property on the date of transfer of original asset
  • purchases a residential house property within a period of 1 year from the date of transfer of original asset
  • constructs a residential house property within a period of 3 years from the date of transfer of original asset

The above stated residential property shall be other than the new property under this section and the assessee shall be in receipt of income taxable under the head ‘house property’ from such property.

Treatment:

Case A: Cost of Residential House purchased or constructed is not less than Net Consideration of Original Asset

The entire amount of capital gain earned shall be non-taxable.

Case B: Cost of Residential House purchased or constructed is less than Net Consideration of Original Asset

The capital gain shall be reduced proportionately by the amount as such capital gain bears to cost of specified investment. In other words, the following formula shall be used:

In case the assessee transfers the acquired residential property within 3 years, the amount earlier allowed as exemption shall be taxable in the year of transfer under the head ‘capital gains’.

If the assessee within 2 years from the transfer of original asset purchases a new residential house property or constructs a new residential house property within 3 years of original transfer, which is other than the house property as per this section and such new property earns the assessee income taxable under the head ‘House Property’, in that case, the amount earlier allowed as exemption shall be taxable in the year of transfer under the head ‘capital gains’.

Option for Deposit to Capital Gains Accounts Scheme is also available.

Section 54G: Capital Gains On Transfer Of Assets On Shifting Of Industrial Undertaking From Urban Areas

Applicability:

Provisions of Section 54G are applicable in case an assessee earns a capital gain on transfer of plant or machinery or land or building or right in such assets used for the purpose of business of an industrial undertaking situated in urban area that is shifting to any area other than urban and the assessee has either:

  • one year before the transfer; or
  • within three years from the date of transfer,

has undertaken any of the following transactions for the purpose of business in the new area:

  • purchased a new plant or machinery
  • acquired land or building
  • constructed a new building
  • shifted the asset and transferred the establishment to new area
  • incurred other expenses as may be allowed by the Central Government by way of notification in the Official Gazette

The combined value of above mentioned transaction shall be collectively called ‘value of new asset’ for the purpose of this section.

Treatment:

Case A: Capital Gain on transfer of original asset is greater than value of new asset

The difference between capital gain and value of new asset shall be charged to tax under the head ‘capital gains’.
Also, if in case the assessee transfers the new asset acquired or constructed or purchased within 3 years, the cost of such asset for the purpose of computation of capital gain at such transfer shall be taken to be Nil.

Case B: Capital Gain on transfer of original asset is less than the value of new asset

Nothing shall be taxable in the year of transfer of original asset under the had ‘Capital Gains’.
But if in case the assessee transfers the new asset acquired or constructed or purchased within 3 years, the cost of such asset at the time of computation of capital gain on such transfer shall be reduced by the amount of capital gain on original asset earlier exempt from tax.

Option for Deposit to Capital Gains Accounts Scheme is also available.

Section 54H: Extension of Time in case of Compulsory Acquisition

Applicability:

·       Where the capital gain arises on transfer of an asset due to compulsory acquisition under any law which is governed by the provisions of Section 54 (Profit on sale of property used for residence) or Section 54B (Profit on sale of Agricultural Land) or Section 54D (Gain on Compulsory Acquisition of Land & Building) or Section 54EC (Capital gain not chargeable for investment in specified securities) or Section 54F (Investment in Residential House Property from Capital Gains in specified assets); and

·       No amount has been received on the date of compulsory acquisition; and

·       The assessee is required to deposit or invest in some specified assets, as the case maybe relating to specific provisions of the aforementioned sections

Point of taxability:

The period available to the assessee for the purpose of specified deposit or investment shall begin from the date of receipt of compensation amount against compulsory acquisition rather than the date of transfer of the original asset.

 

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CA Rachit Jain

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