Understanding Section 54D of the Income Tax Act: FAQs on Exemption of Long-Term Capital Gains

Understanding Section 54D of the Income Tax Act

If you are looking to sell a property and invest the proceeds in another property, you may be able to take advantage of Section 54D of the Income Tax Act. This section allows for certain exemptions and deductions that can help you reduce your tax liability. In this blog, we will explore Section 54D in detail and discuss its various provisions.

What is Section 54D of the Income Tax Act?

Section 54D of the Income Tax Act allows for an exemption on long-term capital gains (LTCG) that arise from the sale of a land or building. The exemption is available if the proceeds from the sale are invested in the purchase or construction of another property. This exemption can be claimed by individuals as well as Hindu Undivided Families (HUFs).

Eligibility for Section 54D

To be eligible for the exemption under Section 54D, the following conditions must be met:

1. The property sold must be a land or building, or both, which has been held for more than two years.
2. The proceeds from the sale must be invested in the purchase or construction of another property. This property must be a residential property and must be purchased or constructed within one year before or two years after the sale of the original property. In case of a construction, the property must be completed within three years from the date of sale of the original property.
3. The new property must not be sold within three years of its purchase or construction. If it is sold within this period, the LTCG exemption will be revoked, and the amount of the exemption will be added to the taxpayer’s income in the year of sale.

Amount of Exemption under Section 54D

The amount of exemption under Section 54D is calculated as follows:

• If the cost of the new property is equal to or greater than the sale proceeds of the original property, the entire LTCG is exempt from tax.
• If the cost of the new property is less than the sale proceeds of the original property, the LTCG exemption will be proportionate to the amount invested in the new property. For example, if the sale proceeds are Rs. 1 crore, and the new property costs Rs. 80 lakhs, the LTCG exemption will be calculated on Rs. 80 lakhs only.

Other Important Points to Note

• The LTCG exemption under Section 54D can only be claimed once in a lifetime.
• If the new property is sold within three years of its purchase or construction, the LTCG exemption will be revoked, and the amount of the exemption will be added to the taxpayer’s income in the year of sale.
• If the new property is purchased or constructed jointly, the LTCG exemption can be claimed by all the joint owners in proportion to their share in the new property.

Conclusion

Section 54D of the Income Tax Act provides an excellent opportunity for taxpayers to save on their tax liability by investing the proceeds from the sale of a property in another property. However, it is crucial to understand the various provisions of this section and ensure that all the eligibility criteria are met to claim the exemption. Consulting a tax expert can help you make the most of this provision and reduce your tax liability.

Read more useful content:

• section 145 of income tax act
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1. What is Section 54D of the Income Tax Act? Section 54D of the Income Tax Act allows for an exemption on long-term capital gains (LTCG) that arise from the sale of a land or building. The exemption is available if the proceeds from the sale are invested in the purchase or construction of another property.
2. Who is eligible to claim the exemption under Section 54D? Individuals and Hindu Undivided Families (HUFs) are eligible to claim the exemption under Section 54D.
3. What is the eligibility criteria for claiming the exemption under Section 54D? To claim the exemption under Section 54D, the following criteria must be met:

• The property sold must be a land or building, or both, which has been held for more than two years.
• The proceeds from the sale must be invested in the purchase or construction of another property, which must be a residential property.
• The new property must be purchased or constructed within one year before or two years after the sale of the original property.
• The new property must not be sold within three years of its purchase or construction.

4. Is the exemption available only on the sale of a residential property? No, the exemption is available on the sale of any land or building, or both, held for more than two years. However, the new property purchased or constructed must be a residential property.
5. How is the amount of exemption calculated under Section 54D? The amount of exemption is calculated based on the cost of the new property. If the cost of the new property is equal to or greater than the sale proceeds of the original property, the entire LTCG is exempt from tax. If the cost of the new property is less than the sale proceeds of the original property, the LTCG exemption will be proportionate to the amount invested in the new property.
6. Can the LTCG exemption under Section 54D be claimed more than once? No, the LTCG exemption under Section 54D can only be claimed once in a lifetime.
7. What happens if the new property is sold within three years of its purchase or construction? If the new property is sold within three years of its purchase or construction, the LTCG exemption will be revoked, and the amount of the exemption will be added to the taxpayer’s income in the year of sale.
8. Can the LTCG exemption be claimed if the new property is purchased or constructed jointly? Yes, if the new property is purchased or constructed jointly, the LTCG exemption can be claimed by all the joint owners in proportion to their share in the new property.
9. Is it necessary to invest the entire sale proceeds in the new property to claim the exemption? No, it is not necessary to invest the entire sale proceeds in the new property. However, if the cost of the new property is less than the sale proceeds of the original property, the LTCG exemption will be proportionate to the amount invested in the new property.