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Understanding Section 54 of the Income Tax Act: Tax Benefits on Capital Gains

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Understanding Section 54 of the Income Tax Act: Tax Benefits on Capital Gains

Section 54 of the Income Tax Act, 1961, provides a significant tax benefit to individuals and Hindu Undivided Families (HUFs) by allowing an exemption on long-term capital gains arising from the sale of a residential property, subject to certain conditions.

Key Features of Section 54

1. Eligibility:
• The benefit under Section 54 is available to individuals and HUFs who sell a residential property classified as a long-term capital asset.

2. Conditions for Exemption:
• The seller must use the capital gains to purchase another residential property.
• The new property must be purchased either one year before the sale or within two years after the sale of the original property. Alternatively, the construction of the new property should be completed within three years of the sale.

3. Amount of Exemption:
• The exemption amount is the lower of the following:
• The actual capital gains arising from the sale.
• The cost of the new residential property purchased or constructed.

4. Utilization of Capital Gains Account Scheme (CGAS):
• If the capital gains are not utilized for the purchase or construction of a new property before the due date for filing the income tax return, the unutilized amount should be deposited in a Capital Gains Account Scheme (CGAS).

5. Restriction on Sale of New Property:
• The newly purchased or constructed property should not be sold within three years from the date of purchase or construction. If sold earlier, the exemption claimed will be reversed and added to the income for the year of sale.

6. Special Provisions:
• From Assessment Year 2021-22 onwards, the benefit of Section 54 is restricted to the purchase or construction of one residential house only. However, for capital gains up to ₹2 crores, the taxpayer can claim exemption for the purchase or construction of two residential houses, but this option can be availed only once in a lifetime.

Importance of Section 54

Section 54 serves as a vital tax-saving tool for taxpayers, encouraging reinvestment in residential properties. It helps mitigate the tax burden on capital gains and supports taxpayers in meeting their housing needs.

By complying with the conditions specified under Section 54, individuals and HUFs can make the most of this beneficial provision and ensure optimal tax planning.

For more information, contact Corporate Genie @ +91-8700202997 | +91-9717332997 or visit our website www.corporategenie.in