Capital gains tax is a tax levied on the profit that you make when you sell a capital asset, such as a property. However, there are certain exemptions available under the Income Tax Act, 1961, that can help you reduce or avoid capital gains tax.
One such exemption is available under Section 54 of the Income Tax Act. This section allows you to claim an exemption from capital gains tax if you sell a residential property and invest the proceeds in the purchase or construction of a new residential property within a certain period of time.
The date of acquiring the new property is important for claiming the exemption under Section 54. The new property must be purchased or constructed within the following time frames:
One year before the sale of the old property
Two years after the sale of the old property
Three years after the sale of the old property, if you are constructing a new residential property
Here are some examples of how the date of acquiring the new property affects the capital gains tax exemption:
You sell your old residential property on April 1, 2023. You can purchase a new residential property anytime from April 1, 2022 to April 1, 2025 to claim the exemption under Section 54.
You sell your old residential property on April 1, 2023. You start constructing a new residential property on May 1, 2023. You can claim the exemption under Section 54 if the construction of the new property is completed within three years from the date of sale of the old property, i.e., by April 1, 2026.
The exemption under Section 54 is available only for long-term capital gains. Long-term capital gains are capital gains arising from the sale of a capital asset that you have held for more than two years.
You can claim the exemption under Section 54 only once in your lifetime.
If you sell the new property within three years of its purchase or construction, you will have to pay capital gains tax on the exemption that you claimed earlier.
If you are planning to sell a residential property, it is important to be aware of the capital gains tax implications. You can save tax by claiming the exemption under Section 54, but you need to make sure that you comply with all of the conditions for claiming the exemption.