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Special Exemptions on Capital Gains on Sale of Immovable Property:

The Government of India provides some exemptions on long-term capital gains arising from the sale of immovable property like houses, apartments, etc.

For instance, you purchased a flat in May 2015 for Rs. 50,00,000 and sold it for Rs. 1,80,00,000 in 2021–22. After indexation the long-term capital gains comes to Rs. 6,300,000 and the tax amount comes to Rs. 12,97,800 which is a huge amount. To provide relief to the tax payers from paying exorbitant amount of taxes, the Income Tax Act has laid down certain exemptions.

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1. Section 54 

Provides exemption on sale of house property on purchase of another house property. From the FY 2023-24, a taxpayer can claim deduction under section 54 up to Rs 10 crores. This limit has been introduced in Budget 2023.

To claim the exemption under section 54, the tax payer needs to re-invest only the amount of capital gains from the sale of house property into buying another house property.

When to purchase new house property?

  • Upto 1 year prior to the sale or
  • Upto 2 years after sale or
  • Under construction property provided the construction is completed within 3 years from the date of sale.

Note: Only one house property can be purchased and the exemption will be withdrawn if this new property is sold within 3 years of its purchase or construction.

2. Section 54F 

Provides exemption when any property other than house property is sold and the entire sale consideration (not only the capital gains) is re-invested in purchasing a new house property. However, if the taxpayer invests only a certain portion of the sale proceeds then the exemption will be proportionate.

The terms of the new house property remain the same as in Section 54. Moreover, similar to section 54 the limit of deduction is capped to Rs 10 crore for section 54F.

Exemption = cost of new house property * capital gains / net consideration

3. Section 54EC 

Provides exemption when the sale proceeds of house property are re-invested into certain specific bonds.

The taxpayer can invest up to Rs. 5,000,000 in the bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) within a period of 6 months and before the tax filing deadline.

These bonds can be redeemed after 3 years from the date of sale.

4. Section 54B 

Provides exemption if you transfer (sell) land which had been used for agriculture purposes by you or your parents 2 years prior to the sale and re-invest in another agricultural land (urban or rural) within 2 years from the date of sale.

The exemption amount will be either the capital gain or investment in the new asset whichever is lower.

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