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Income tax

Understanding Section 54C: A Guide to Tax Benefits for Property Sellers in India

The Income Tax Act's Section 54C, which allows tax exemptions on long-term capital gains on the sale of residential property, is thoroughly explained in this blog. For taxpayers wishing to reinvest in newly constructed residential properties, it describes the qualifying standards, investment needs, and filing methods. The blog also offers helpful examples of how to compute the exemption and what paperwork is required in order to claim it.

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Understanding Section 54C: Tax Exemption on Capital Gains from Property Sales

Overview

For individuals and Hindu Undivided Families (HUFs), Section 54C of the Income Tax Act, 1961 offers a tax exemption on capital gains resulting from the transfer of a residential property. The purpose of this clause is to stimulate public investment in newly constructed residential dwellings, thereby advancing the housing sector. We will examine the contents of Section 54C in this blog post, along with its application, eligibility conditions, and filing requirements.

Section 54C: What is it?

Individuals and HUFs may claim an exemption from long-term capital gains (LTCG) on the sale of residential property under Section 54C, provided that the taxpayer uses the proceeds to buy a new residential home. This exemption is advantageous for individuals wishing to reinvest in real estate because it applies to both individual taxpayers and HUFs.

Principal Elements of Eligible Property under Section 54C

Residential property transfers are covered by Section 54C exemption. This covers any structure or land that is attached to it and utilized for residential usage.

Investment Requirement

The taxpayer must use the whole amount of capital gains to buy a new residential property within a certain time period in order to be eligible for the exemption.

Duration of Investment:

  • Either a year prior to or two years following the original asset's transfer date must be used to purchase the new property.
  • If new property is being built, it needs to be finished within three years after the old property's transfer date.

The Exemption Quantum

The amount of capital gains from the sale of the original property is the maximum exemption allowed by Section 54C. The exemption will be commensurate with the amount invested in the new property if it is less than the total capital gains.

No Maximum

The amount of capital gains that are free from tax under this clause is not limited in any way.

Requirements to File an Exemption Claim

In order to be eligible for the exemption under Section 54C, the following requirements need to be met:

  • Property Type Sold: The initial sale of property had to be a long-term capital asset. If a property is owned for more than 24 months prior to sale, it is deemed a long-term capital asset.
  • Acquisition of New Property: The taxpayer is required to purchase or construct a new residential property.
  • New Property Holding Period: Three years or more must pass after the date of acquisition for the newly acquired property to be held. In the event that the new property is sold during this time, the exemption specified in Section 54C will be revoked, and the capital gains will be taxable.

Exemption Calculation As per Section 54C

Use these procedures to determine the exemption under Section 54C:

  1. Calculate the Capital Gains Over Time (LTCG): Subtract the indexed cost of acquisition and improvement from the original property's sale consideration to determine the LTCG.
  2. LTCG Calculation:
    • LTCG = Sale Price − (Acquisition + Improvement Cost)
  3. Investment in New Property: Determine the sum of money used to purchase the new home.
  4. Calculating Exemption:
    • The full LTCG will be excluded if the investment in the new property equals or exceeds the LTCG.
    • The exemption will be commensurate with the amount invested if it is less than the LTCG.

    Exemption = (Amount Invested / LTCG) × LTCG

Documentation Needed

The taxpayer must keep the appropriate records in order to claim the exemption under Section 54C. These records include:

  • Sale Deed: The original property's sale deed.
  • Purchase Agreement: The contract pertaining to the acquisition of a brand-new home.
  • Evidence of Investment: Bank records or invoices demonstrating the funds paid for the purchase of the new asset.
  • Income Tax Records: Copies of income tax records that show the exemption claim and the initial property sale.

How to File an Exemption Request

When filing income tax returns, taxpayers are required by Section 54C to declare the exemption and disclose the sale of the original property.

  • Form 2D: The taxpayer can claim the exemption by completing the relevant sections in the income tax return when filing the return.
  • Assessment by Tax Authorities: The income tax authorities will examine the exemption that was claimed under Section 54C. The required paperwork must be provided by taxpayers in order to support their claims.

In Brief

For individuals and HUFs, Section 54C offers a significant tax exemption on long-term capital gains on the sale of residential property. Reinvesting the revenues into a new residential property allows taxpayers to make large tax savings. Anyone hoping to take use of this exemption under Section 54C must comprehend the terms, eligibility conditions, and filing obligations under this section.

Please contact our staff at myITRonline if you require assistance with capital gains taxation, property sales, or other related questions. We are here to guide you through the challenges of complying with income tax laws.

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Note-All the aforementioned information in the article is taken from authentic resources and has been published after moderation. Any change in the information other than fact must be believed as a human error. For queries mail us at marketing@myitronline.com



Krishna Gopal Varshney, Founder & CEO of Myitronline Global Services Private Limited at Delhi. A dedicated and tireless Expert Service Provider for the clients seeking tax filing assistance and all other essential requirements associated with Business/Professional establishment. Connect to us and let us give the Best Support to make you a Success. Visit our website for latest Business News and IT Updates.


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Krishna Gopal Varshney

An editor at Myitronline

Krishna Gopal Varshney, Founder & CEO of Myitronline Global Services Private Limited at Delhi. A dedicated and tireless Expert Service Provider for the clients seeking tax filing assistance and all other essential requirements associated with Business/Professional establishment. Connect to us and let us give the Best Support to make you a Success. Visit our website for latest Business News and IT Updates.

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