When it comes to filing income tax returns (ITRs), many taxpayers inquire if there are separate rules governing the taxation of long-term capital gains (LTCG) from the sale of immovable properties and listed/unlisted shares.
The Indian taxation system is built upon a complex framework aimed to facilitate government revenue collection and ensure its effective functioning. Among the concerns of taxpayers, the LTCG tax has been a persistent issue, especially for those engaged in selling immovable properties like land or buildings.
The Income Tax Act introduced Section 54 and Section 54F to assist individuals in reducing tax liabilities and encouraging investment in the real estate sector. These sections of the Act provide individuals with exemptions from capital gains tax when they reinvest the sale proceeds in a new property. The extent of the exemption is dependent on the amount of capital gain and the timeline within which the new property is acquired.
These provisions ease the tax burden on individuals who sell properties, listed/unlisted shares, or other assets and reinvest the proceeds in a new property. Such initiatives promote investments in productive assets, contributing to economic growth.
In the context of investments and financial planning, understanding LTCG and their taxation is of utmost importance. These capital gains pertain to profits generated from selling an asset held for more than one year. In India, these gains are subject to lower tax rates compared to short-term capital gains.
Sections 54 and 54F: Earning tax benefits on sale of residential property
When you sell a residential property and realize a profit, you become liable to pay capital gains tax on the gains made. However, two sections within the Income Tax Act can assist you in reducing your tax liability.
Section 54: This section provides an exemption on LTCG resulting from the sale of a residential property if you reinvest the gains into another residential property in India.
Section 54F: This section grants a tax exemption on LTCG arising from the sale of any long-term capital asset, except for a residential house. This includes assets such as equities (both listed and unlisted), jewellery, bonds, etc. To avail of this exemption under Section 54F, the net consideration, including the gains, must be reinvested in a residential house in India
Eligibility criteria to claim exemptions under Section 54 or Section 54F
To claim the exemption under either Section 54 or Section 54F, you need to fulfill the following eligibility criteria:
Time period for purchase or construction: To avail of the benefits of tax exemption under Section 54 or Section 54F of the Income Tax Act, 1961, the new residential property must be purchased or constructed within a specific time frame after the date of transfer of the old property. For Section 54, the property must be acquired or constructed within one year before the date of transfer or within two years after the date of transfer. On the other hand, for Section 54F, the property must be purchased or constructed within three years after the date of transfer.
Value of the new property: The total amount invested in the new residential property must equal or exceed the capital gains made from the sale of the old property.
Holding period: The newly acquired residential property must be held for a minimum period of three years. Selling the property before this three-year holding period would necessitate the payment of capital gains tax on the entire gain, even if you have previously claimed the exemption under Section 54 or Section 54F.
The total amount invested in the new residential property must be equal to or greater than the capital gains from the sale of the old property.
Who can claim exemptions under Sections 54 and 54F?
Section 54 and Section 54F of the Income Tax Act provide valuable exemptions from capital gains tax to individuals and Hindu Undivided Families (HUFs) who reinvest the sale proceeds of a property into a new property. Effective from the assessment year 2024-25, the exemption limit for these sections has been raised to ₹10 crore.
This substantial increase in the exemption limit is indeed a favourable step for taxpayers, enabling them to save more on capital gains tax. Moreover, the government’s decision to raise the exemption limit aligns with its aim of fostering a robust tax system and promoting a thriving real estate market.
The increase in the exemption limit for Section 54 and Section 54F serves the following key objectives:
- Providing relief to taxpayers who have earned capital gains from property sales.
- Encouraging investments in the real estate sector.
- Promoting a fairer and more equitable tax system.
How does the increase in exemption limit help?
The rise in the exemption limit is expected to yield positive effects on the real estate sector. It is likely to stimulate increased property transactions as more individuals would be encouraged to sell their old properties and invest in new ones, thereby augmenting demand in the market. Consequently, this surge in demand is anticipated to lead to a rise in property prices, benefiting property owners.
Additionally, the increased exemption limit will prove advantageous for taxpayers by lowering their tax burden. This would free up additional funds for them to explore investment opportunities in other assets like stocks, bonds, or mutual funds. Such diversification of investments could contribute to fostering economic growth.
