Budget 2019: Now use capital gains to buy second house also; Know how Section 54 works

Updated: February 2, 2019 2:06:10 PM

Currently, Section 54 exemption is available only for the investment made in one residential house in India.

budget 2019, interim budget 2019, Section 54, ltcg tax in budget 2019, ltcg on sale of property, LTCG on house property, second houseThe Finance Bill, 2019 has proposed to extend the exemption for investment made, by way of purchase or construction, in two residential houses provided the amount of capital gains does not exceed Rs 2 crore.

Any long-term capital gain (LTCG), arising to an individual or HUF, from the sale of residential house property is exempted to the extent such capital gain is invested in another residential house property. Currently, Section 54 exemption is available only for the investment made in one residential house in India.

The Finance Bill, 2019 has proposed to extend the exemption for investment made, by way of purchase or construction, in two residential houses provided the amount of capital gains does not exceed Rs 2 crore. If the assessee exercises this option, he shall not be subsequently entitled to exercise the option for the same or any other assessment year, i.e., the assessee can exercise this option only once in a lifetime.

Considering the socio-economic need of middle class families to maintain houses at two locations on account of their job, children’s education, care of parents etc., this relief would address the genuine concerns of house owners. This exemption is, however, the one-time tax saving opportunity.

Let’s understand this amendment with the help of illustrations:

Scenario 1

Mr. A purchased a residential house in the year 2005-06 for Rs 2 crore. This house property was sold for Rs 10 crore in the year 2019-20. He invested the gain in the two house properties worth Rs 4 crore each.

The option to claim capital gains exemption under Section 54, in respect of two houses, shall not be available as the amount of capital gains exceeds Rs 2 crore. Thus, he is eligible to claim the exemption only in respect of any one residential house property.

Scenario 2

Mr. A purchased a residential house in the year 2005-06 for Rs 9 crore. This house property was sold for Rs 10 crores in the year 2019-20. He invested the gain in the two house properties worth Rs 50 lakh each.

The option to claim capital gain exemption under Section 54, in respect of two houses, shall be available as the amount of capital gains does not exceed Rs 2 crore. Thus, he is eligible to claim the exemption in respect of investment made in both the residential house properties.

Scenario 3

Mr. A purchased gold in the year 2005-06 for Rs 2 crore. This gold was sold for Rs 10 crore in the year 2019-20. He invested the gain in two house properties worth Rs 4 crore each.

The proposal to extend the benefit of investment in two houses has been made in Section 54 only. The exemption under Section 54F shall continue to be the same and it would be available only for the investment made in one house. Thus, Mr. A can claim exemption under Section 54F only in respect of the investment made in one house. He shall get the proportionate exemption as the entire capital gain was not invested for purchase of a house property. If net consideration, arising from the transfer of original capital asset, is not invested fully in purchase or construction of a residential house, the exemption shall be granted proportionately. The proportionate exemption shall be in the ratio of amount invested out of net consideration.

Scenario 4

Mr. A purchased gold in the year 2005-06 for Rs 9 crore. This gold was sold for Rs 10 crore in the year 2019-20. He invested the gain in two house properties worth Rs 50 lakh each.

Mr. A can claim the exemption under Section 54F only in respect of one house. Mr. A can’t opt to claim the exemption in respect of both the houses even if his capital gains is less than Rs 2 crore as the option given to invest in two houses properties is only proposed in Section 54. Further, Mr. A will get proportionate exemption under Section 54F as the entire capital gain was not invested for purchase of a single house property.

(By CA Naveen Wadhwa, DGM, Taxmann.com)

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