If any person or Hindu Undivided Family sells the residential house or land attached to it, and capital gain arises on this activity, then this capital gain will be exempted from tax upon the following conditions which are as under:
1. This exemption will be given only to Individual or Hindu Undivided Family.
2. Sold house should be used for residential purpose.
3. Sold house may be used for self residential purpose or other.
4. Capital gain on sold house must be long term capital gain at the time of its transfer.
5. Sold house income must be taxable under the head of "Income from house property".
6. The assessee will have to acquire only of residential house.
7. Residential house can be purchased for himself or other.
8. The assessee can purchase house one year before or two year after its transfer.
9. The assessee can get constructed the house within three year after its transfer.
Quantum of Rebate:
Under Section 54 The amount of exempted capital gain is restricted to the amount of new residential house purchase or to cost of constriction of the house. If cost of purchase the house or construction cost of the house is more then capital gain then all amount of capital gain will be exempted from the tax, opposite cost of purchase the house or construction cost is less then the amount of capital, Capital gain upto the cost of house or construction cost will be exempted and remaining amount will be taxable.
Other things to be considered:
1. According to Circular of CBDT, the cost of land is a part of residential house, whether how has been constructed or constructed house has been purchased. If a part of capital gain is spent on the purchase of land and some part in the construction of residential house, then for getting rebate under section 54, the total of both cost is taken into consideration, provided acquisition of land and construction of house both have been completed in the prescribed period.
2. House does not only mean complete independent house. It also includes independent residential house, namely : flats, in multi - storey complex.
3. If under self financing scheme any flat is allotted to a person by Co-operative Society, Housing Board or Development Authority, it will be treated as construction of house. Under this situation, if house is not allotted with in prescribed period, the assessee shall be entitled to avail exemption.
4. If the assessee dies within prescribed period, the benefit under this section shall be given to legal representative provided essential condition are fulfilled by them.
5. The assessee can purchase more then one house (new or old) out of capital gain or get constructed more then one house or can get a house constructed and purchase another house.
6. If the assesee constructed a house on the first floor on the existing residential house, even then he can demand exemption of capital gain on it.
7. The assessee can start construction of house before the transfer original house, but its completion should be after the transfer of first house within three years.
8. If the assessee has acquired the house at the time of full payment of consideration, although sale agreement was not made in his favour so far, even then he can claim capital gain exemption on it.
9. The house which has been purchased or constructed, should not be transferred upto 3 year from the date of purchase or date of construction of house otherwise the rebate which was allowed earlier, that will be cancelled and the profit on the transfer of this new house and that the rebate amount provided earlier will be taxable capital gain in the year in which the new house was transferred.
Cost of acquisition of new house = Purchase price of new house - Exempted amount of capital gain on 1st house.
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