Long term capital gain is taxed at 20%.The rate is high and as a taxpayer or professional, you should be aware of saving long term capital gain by using sec 54. Here I have tried to explain main points of section 54 through questions and answers.

Who can claim deduction u/s 54?

Only individual and HUF can take benefit of section 54..

For which transaction exemption u/s  54 is allowed?

Section 54 can help to save the tax when any residential house is transferred and the asset should be long term asset. It means that you have owned the residential house for more than 3 years from the date of transfer.

Which asset should be purchased?

You have to purchase another residential house within 1 year before the date of transfer or within 2 years after the transfer. The deduction is also available if you construct the residential house within 3 years from the date of transfer.Cost of plot can be included as cost of new residential house.

How much exemption is allowed?

Exemption is allowed up to the least of following:

  1. cost of the new residential house
  2. capital gain.

What if you purchase or construct two new residential houses?

The exemption is available to only one unit. But you can choose for which house you are seeking exemption. Obviously, you will choose the house which has more cost.
What to do if you can’t find another residential house instantly?
It is obvious that you do not invest a big money in any house. It may take time to search for another house. But you can avail exemption u/s 54 by depositing the amount you want to invest in capital gain accounts scheme before furnishing the return of income or within due date for furnishing the return u/s 139(1), whichever is earlier.The amount of capital gain accounts scheme should be utilised to purchase the asset within prescribed time limit. If it is not utilized accordingly , the exemption will be reversed and you have to pay capital gain for unutilized amount.
What if you sell  the new house property?
As per rule of exemption u/s 54, you have to own the property at least up to 3 years from the date of purchase/construction. If you sell the property before it, you have to pay short term capital gain on the cost of asset for which you have claimed exemption u/s 54.
I hope you use the points I have narrated in this article to claim exemption. If you have any query, you can ask it in comment section. Don’t forget to share this article with your friends. 

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