Selling a Property: Capital Gains and the Exemptions Under 54 and 54F
A property sale is usually the largest single tax event in a family's year, and the exemptions that reduce it are conditional on dates and on where the money sits. Most claims that fail do so on timing, not on eligibility.
Working out the gain
Start with the full value of consideration, and compare it with the stamp duty value — where the stated consideration is below the stamp duty value beyond the tolerance margin, the stamp duty value is substituted.
From that, deduct:
- Cost of acquisition, and cost of improvement.
- Expenses wholly and exclusively in connection with the transfer — brokerage, legal fees, stamp duty on the sale.
Whether indexation applies depends on the asset, the date of acquisition and the rate option under which the gain is being computed — this is the point at which a computation should be run both ways before the return is filed, because the answer differs between properties.
Where a property was inherited or gifted, the previous owner's cost and period of holding carry over to you. That usually converts what looks like a short-term sale into a long-term one.
Section 54 — selling a house, buying a house
Long-term gain on a residential house is exempt to the extent it is invested in another residential house:
- purchased within one year before or two years after the transfer, or
- constructed within three years of the transfer.
The exemption is limited to the gain, not the sale value. There is a lifetime option, subject to a cap, to invest in two houses instead of one.
Section 54F — selling anything else, buying a house
Where the asset sold is not a residential house — land, shares, gold — the exemption requires investing the entire net consideration, not merely the gain, in a residential house. Invest part and you get a proportionate exemption.
54F also carries conditions on other property you own: holding more than one other residential house at the date of transfer disqualifies the claim.
Section 54EC — bonds
Gain on land or building can be invested in specified bonds within six months of the transfer, subject to an annual monetary ceiling and a lock-in period. Useful where no purchase is planned, and it can be combined with a partial reinvestment.
The Capital Gains Account Scheme
This is where claims most often fail. If the new house has not been bought or built before the return filing due date, the unutilised amount must be deposited in a Capital Gains Account Scheme account with a bank before that date.
Money left in an ordinary savings account is not a deposit under the scheme, however clear the intention to buy. The exemption is withdrawn and taxed in the year the period expires.
Practical points
- Fix the dates first — date of transfer, and the reinvestment window it creates. Every condition runs from the transfer date.
- Keep every cost document: the original purchase deed, improvement bills, brokerage receipts. Undocumented improvement cost is simply not allowed.
- Where the buyer is required to deduct TDS on the property purchase, confirm it appears in your 26AS before you file.
- Compute advance tax on the gain in the instalment following the sale. A large gain and no advance tax means interest even where the exemption eventually applies.
- Deposit into the Capital Gains Account Scheme if there is any doubt about completing the purchase in time. It is reversible; a lapsed deadline is not.
Planning a property sale, or already sold and unsure of the exemption? Talk to Kunal P Shah & Co.