Taxability in case of Sale of Residential House Property

A residential house is necessity for every individual or family. With the growing family, people often think to switch from smaller house to a bigger one. Government of India has also provided relaxations for the same.

As per the section 54 of the Income Tax Act, 1961,if an assesse is selling residential house property, they can avail tax exemption from capital gain if satisfied following conditions:-

• 1. Assesse should be Individual or HUF;
• 2. The residential house property sold should be classified as long term capital asset (immovable property classified as long term capital asset when held for 2years or more from the date of purchase of the property);
• 3. The new residential house property should be in India;
• 4. The capital gain arising should be invested in purchase or construction of another residential property. Purchase of residential house should be either 1year before or within 2years from the date of transfer/sale of the property. Construction of residential house should be done within 3years from the date of transfer/sale of the property.

When the assesse has sold the residential house property in the PY but yet to make investment in purchase or construction of the new residential house and the time limit to make the investment has also not expired, assesse should make the deposit of gains in Capital Gains Account Scheme (CGAS) before the due date of filing of income tax return in order to avail exemption under section 54.

The exemption shall be lower of the following: –

• 1. Long term capital gain arising from the transfer/sale of the residential house property; or
• 2. The amount of investment is made in purchase or construction of a new residential property,

The balance amount shall be taxed as capital gains.

The property purchased or constructed after claiming the benefit under section 54 should not be sold within 3years of purchase or construction. If the same is sold, then the exemption claimed shall be taxable in the year of sale of new residential property. Also, the amount deposited in CGAS if not utilized within the time period prescribed in section 54 and for the said purpose, the same will be taxable as income of the PY in which 3years expired from the date of transfer of the property or in the PY in which amount is utilized for any other purpose.

With effect from Assessment Year 2020-21 corresponding to FY 2019-20, a capital gain exemption is available for purchase of two residential houses in India. However, the exemption is subject to the capital gain not exceeding Rs. 2 crore. Also, the exemption is available only once in the lifetime of the seller.

As per the Finance Bill, 2023, from 1st April 2023, the capital gains tax exemption under Section 54will be restricted to Rs.10 crores.