Section 54 relief extended to 2 residential houses – explained with illustrations



Section 54 relief extended to 2 residential houses – explained with illustrations
Any long-term capital gains, arising to an Individual or HUF, from the sale of residential house property is exempted to the extent such capital gains are 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 crores. 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 crores each.
Particulars Amount (In Crores)
Full value of consideration
Less: Cost of acquisition (ignoring the benefit of indexation)
10
(2)
Long-term Capital Gains
Less: Section 54 exemption
8
(4)
Taxable long-term capital gains 4

The option to claim capital gain exemption under Section 54, in respect of two houses, shall not be available as the amount of capital gains exceeds Rs. 2 crores. 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 crores. 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.
Particulars Amount (In Crores)
Full value of consideration
Less: Cost of acquisition (ignoring the benefit of indexation)
10
(9)
Long-term Capital Gains
Less: Section 54 exemption
1
(1)
Taxable long-term capital gains Nil
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 crores. 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 crores in the year 2019-20. He invested the gain in the two-house properties worth Rs. 4 Crore each.

Particulars Amount (In Crores)
Full value of consideration
Less: Cost of acquisition (ignoring the benefit of indexation)
10
(2)
Long-term Capital Gains
Less: Section 54F exemption (in proportion to sales consideration invested in one house, i.e., 8*4/10)
8
(3.2)
Taxable long-term capital gains 4.8

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 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 ratio of amount invested out of net consideration.
Scenario 4

Mr. A purchased gold in the year 2005-06 for Rs. 9 crores. This gold 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.
Particulars Amount (In Crores)
Full value of consideration
Less: Cost of acquisition (ignoring the benefit of indexation)
10
(9)
Long-term Capital Gains
Less: Section 54F exemption (in proportion to sales consideration invested in one house, i.e., 1*0.50/10)
1
(0.05)
Taxable long-term capital gains 0.95

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.

Disclaimer: In the illustrations no 3 & 4, we have assumed that Mr. A doesn’t own more than one residential house on the date of sale of residential house. We have taken this assumption so as to understand the impact of this amendment. In absence of this assumption, Section 54F exemption would not be available as Mr. A buys a new house within one year from date of transfer of original asset.

Published by Business So Simple

Hi, I am business consultant working with a team of Chartered Accountants, Company Secretaries, Lawyers & MBAs. I am promoter of " Make Your Business So Simple" "Make Education So Simple" Make Life So Simple" Make Legal Affairs So Simple".

7 thoughts on “Section 54 relief extended to 2 residential houses – explained with illustrations

  1. Hello I Read your article. Thanks for sharing such beautiful information, and I hope you will share some more info about Tax Service. You wrote really very well, I really like your blog and information provided by you. I appreciate your work.Thanks

    Like

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