Section 54 of Income Tax Act
Section 54 of Income Tax Act: The financial advantages provided to Indian property sellers under Section 54 will be the main topic of this guidance.
To better target tax breaks and exclusions, the Budget 2023–24 set a limit on the deduction from capital gains on investments in domestic properties under Sections 54 and Section 54F at Rs 10 crore. We will comprehend the effects of the adjustments made to Section 54 and how they will impact property sellers in this guidance.
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Section 54 Income Tax : Article 54 of the income tax
Any benefit earned is considered revenue in India and is subject to a variety of tax laws. The same holds true for the money received from selling a piece of land. A purchaser is responsible for paying capital gains tax, either long-term capital gains (LTCG) or short-term capital gains (STCG), depending on the length of time the property was held. (STCG).
However, the income tax law permits tax exemptions under Sections 54 and 54F to guarantee advantages for proprietors who sell their current property in order to buy a new one to reside in rather than for financial gain.
To better target tax breaks and exclusions, the Budget 2023–24 set a limit on the deduction from capital gains on investments in domestic properties under Sections 54 and Section 54F at Rs 10 crore. We will comprehend the effects of the adjustments made to Section 54 and how they will impact property sellers in this guidance.
Article 54 of the income tax
Any benefit earned is considered revenue in India and is subject to a variety of tax laws. The same holds true for the money received from selling a piece of land. A purchaser is responsible for paying capital gains tax, either long-term capital gains (LTCG) or short-term capital gains (STCG), depending on the length of time the property was held. (STCG).
However, the income tax law permits tax exemptions under Sections 54 and 54F to guarantee advantages for proprietors who sell their current property in order to buy a new one to reside in rather than for financial gain.
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Section 54 Income Tax : Key Information
Buying topic
Individuals and Hindu intact households are the only groups eligible for deductions under Section 54. You cannot register for this advantage on behalf of a company, business, or other entity.
Section 54 Income Tax – Type of asset
Only when a residential property is sold and the proceeds are put toward another residential property can a discount be claimed. Section 54 does not apply to the selling and acquisition of any other kind of land, including commercial, agricultural, and industrial properties.
Applicability on long-term capital gains
You must keep the property for a lengthy time in order to be eligible for deductions under Section 54. “Long term” is defined by the income tax legislation as 24 months or 2 years. If the property is sold within this time frame, the gain will be considered a short-term capital gain, and the relief provided by Section 54 will not apply.
Section 54 Income Tax – Various characteristics
According to the Finance Act 2020’s change to Section 54. A taxpayer may deduct their expenditure in two domestic homes from their taxes. If the LTCG does not surpass Rs 2 crore, the exemption on expenditure is possible for the acquisition or building of two domestic homes.
Whether the new building is still being built or is already finished and available for occupancy, Section 54 benefits still apply.
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Section 54 Income Tax : Updated funding timetable
There is a deadline for claiming the Section 54 discount for the new acquisition.
Timeline for ready-to-move-in property
Within two years of selling the prior house, the expenditure must be made in the new property. If you buy a new property before selling your old one and the purchase was made within a year of the sale, you may still be eligible for Section 54 discounts. As long as you meet the other requirements, let’s say you sold the old home in January 2021 and purchased the new one in January 2020. In that case, you would be eligible to claim Section 54 expenses.
Timetable for properties that are being built or that are your own
A property that is still being built must be finished three years after the selling of the previous home. Even if you reserved a new house or began building before the selling of the previous home, you can still claim the Section 54 exemption.
The investment deadline has been prolonged until March 31, 2023.
The Central Board of Direct Taxes (CBDT) prolonged the limit for making these expenditures in a circular that was released on January 6, 2023. The notice states that the limit has been extended to March 31, 2023. For expenditures that had to be made between April 1, 2021, and February 28, 2022.
Where the new building is located
Only the selling profits must be used to buy the new property in India. A building bought or constructed outside of India is not eligible for deductions under Section 54.
Amount of exemption under Section 54
Exemption under Section 54 would be lower of the following:
- Amount of capital gains arising on transfer of residential house, or;
- Amount invested in purchase/construction of a new residential property, including the amount deposited in the Capital Gains Deposit Account Scheme.
For better targeting of tax concessions and exemptions, deduction from capital gains on investment in residential house has been capped at Rs 10 crore in the Budget 2023-24.
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Application of Section 54 to real estate, numerous plots, and flats
Section 54 Income Tax : Deduction that applies to property
The Delhi Income Tax Appellate Tribunal decided in May 2022 that the deduction under Section 54 is valid even if the recently purchased property is referred to as “land” in the selling document.
Deduction is offered for homes built on numerous plots.
As was already stated, Section 54 permits the individual to subtract new investments made in “residential property”. Homes that take the shape of flats and apartments are referred to as residential buildings.
However, Section 54 deduction can be used even if you purchase numerous sites to construct a single home. According to a recent Delhi Income Tax Appellate Tribunal decision. The same holds true even if the adjacent property is purchased by drafting and filing numerous sale deeds in order to construct a single residence. The land being built must be contained within a single compound, but these plots must be close to one another. For deductions to be claimed under Section 54, this guideline must be meticulously observed.
Discount is offered for numerous flats or apartments that make up one house.
If you buy more than one flat or residence to build a single unit. The deduction under Section 54 is also relevant.
However, Section 54 deduction can be used even if you purchase numerous sites to construct a single home. According to a recent Delhi Income Tax Appellate Tribunal decision. The same holds true even if the adjacent property is purchased by drafting and filing numerous sale deeds in order to construct a single residence. The land being built must be contained within a single compound, but these plots must be close to one another. For deductions to be claimed under Section 54, this guideline must be meticulously observed.
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Discount is offered for numerous flats or apartments that make up one house.
If you buy more than one flat or residence to build a single unit. The deduction under Section 54 is also relevant.
Deduction available on independent floors forming one home
Reduction possible for independent floors making one residence If you use one or more independent levels of a single property to construct a single residential unit. Section 54 reduction would be applicable.
Note: In either case. It will be the taxpayer’s responsibility to show that the apartments/plots/ independent floors are a separate entity. Failure to do so would disqualify them from receiving the Section 54 compensation. Tax officials reserve the right to limit the advantage if there are any delineations in the property.
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Deduction available on independent floors forming one home
Date of new home ownership
Deductions under Section 54 are calculated starting from the date that the new residential home is in possession. Regardless of the property classification, whether it is still under construction or is available for occupancy.
Section 54 Income Tax : Scheme for Capital Gain Deposit Accounts
Let’s say that despite selling your previous house, you are still searching for a new one. But now is the moment to make your income tax payment. In this case, the unutilized sum can be deposited in a Capital Gains Deposit Account Scheme in any office of a public sector bank in accordance with the Capital Gains Deposit Accounts Scheme. 1988, to take advantage of Section 54’s benefits.
Deduction available on independent floors forming one home
Withdrawing the funds from this account within the allotted time period of two or three years. As appropriate, will allow you to buy or build a new home.
Purchase of an undivided portion of property is covered by Section 54(F): ITAT
The Chennai court of the Income Tax Appellate Tribunal (ITAT) has decide that the capital gains deduction under Section 54F is permitted on the acquisition of an entire portion of property.
The tribunal’s ruling relates to a case in which the taxpayer purchased property from his wife in 2011 through a settlement agreement and sold a portion of the undeveloped land.
Deduction available on independent floors forming one home
The tribunal’s ruling relates to a case in which the taxpayer purchased property from his wife in 2011 through a settlement agreement and sold a portion of the undeveloped land. Gains from the selling were put toward buying a new home from the wife with money spent in the sale. In relation to this expenditure, the assessee sought tax exemptions under Section 54F of the income tax. According to the evaluating inspector, the taxpayer was ineligible for the exemption, so the claim was rejected.
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