Everyone knows that if we promote a residential property and buy one other one, no capital achieve tax is required to be paid, supplied sure situations are fulfilled (Part 54 of the Earnings Tax Act, 1961). We’re additionally conscious that such an exemption can be accessible on revenue from long-term property apart from residential property (Part 54F). Many consider that the quantity to be invested within the new property to avail of the capital achieve advantages is similar in each circumstances; nevertheless, this isn’t the case.
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Earlier than we go into additional particulars, allow us to summarise the exemption supplied in each these sections:
Part 54:
- Exemption accessible for revenue arising from the sale of ‘residential property and/or land appurtenant’ thereto
- Such an asset ought to be a long-term asset
- To say the exemption, the ‘quantity’ must be invested in one other residential property
- Such funding is made inside 1 yr earlier than the sale or inside 2 years from the sale.
- In case of development of the brand new property, the interval is 3 years from the date of sale.
Part 54F:
- Exemption accessible for revenue arising from the sale of ‘any asset apart from residential property’ (for e.g.: fairness mutual funds, gold, land, and so forth)
- Such an asset ought to be a long-term asset
- To say the exemption, the ‘quantity’ must be invested in one other residential property
- Such funding is made inside 1 yr earlier than the sale or inside 2 years from the sale.
- In case of development of the brand new property, the interval is 3 years from the date of sale.
Gross sales Consideration vs. Capital Features Quantity:
The ‘quantity’ in each the above sections to say the tax profit is completely different. In Part 54, the quantity required to be invested is the capital features quantity, whereas in Part 54F, the quantity required to be invested is the online gross sales consideration. Allow us to perceive this with an instance.
Suppose Mr. A bought his long-term capital asset (a residential property for the aim of Part 54 or fairness mutual funds for the aim of Part 54F) for Rs. 90 lakhs. The opposite particulars are:
- Buy value of such asset bought – Rs. 40 lakhs
- Capital Achieve – Rs. 50 lakhs
To say the complete long-term exemption underneath part 54 (the place residential property is bought), Mr. A should buy a brand new residential property for no less than Rs. 50 lakhs, which is the quantity of capital features.
Whereas to say the complete long-term exemption underneath part 54F (the place fairness mutual funds are bought), Mr. A should buy a brand new residential property for no less than Rs 90 lakhs, which is the quantity of internet gross sales consideration.
Do discover that to say the identical quantity of tax profit, i.e. Rs 50 lakhs of long-term capital achieve exemption, the quantity to be invested is larger in case of Part 54F (Rs. 40 lakhs larger in our instance) as in comparison with the quantity to be invested in case of Part 54.
What occurs if such an invested ‘quantity’ is lower than required as per these sections?
If the invested ‘quantity’ is lower than the required, the capital achieve exemption will likely be decreased to such extent. Within the above instance, allow us to assume that the acquisition value of the brand new residential property is Rs. 40 lakhs.
On this case, the exemption underneath Part 54 shall cut back to Rs. 40 lakhs, which is the quantity invested and the stability long-term capital features quantity of Rs. 10 lakhs shall be provided to tax.
The exemption underneath Part 54F shall be calculated as follows:
Buy value of recent residential property ÷ Sale worth of unique capital asset X worth of capital features
On this case, will probably be: Rs. 40 lakhs ÷ Rs. 90 lakhs X Rs. 50 lakhs = Rs. 22.22 lakhs. Stability of Rs. 27.78 lakhs shall be provided to long-term capital achieve tax.
Different situations:
Do be aware that there are different standards to be fulfilled to say exemption underneath each sections like the price of new residential property is restricted to Rs. 10 crores, in case the quantity shouldn’t be used for this goal until the time of the due date to file the return, it must be deposited in Capital Features Account Scheme (CGAS) and to be utilised for this goal inside the time-frame, and so forth. These and different situations usually are not coated on this article.
Be aware: The corresponding clauses underneath the Earnings Tax Invoice, 2025 are Clause 82 and Clause 86 for Part 54 and Part 54F, respectively.
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