ITR Filing FY25: Section 54 Exemption - How Homeowners Can Save Tax on Capital Gains?

As taxpayers are prepping for ITR filing for FY25, here’s how you can claim Section 54 exemption to save on capital gains tax from selling a house. Section 54 of the Income Tax Act offers relief to taxpayers by exempting capital gains from the sale of a residential property, provided the gains are reinvested in another residential property. This helps individuals reduce or eliminate their tax liability on capital gains.

Who Can Claim Section 54 Exemption?

Only individuals and Hindu Undivided Families (HUFs) are eligible for this exemption. The benefit applies when:

• The sold property is a long-term capital asset (held for at least 24 months).
• The asset must be a residential house, and income from it should be taxable under the head "Income from House Property."
• The new residential property must be situated in India.
• The new property can be purchased either within one year before or two years after the date of sale or transfer.
• If the taxpayer chooses to construct a new house, it must be completed within three years from the date of sale or transfer.

Benefits of an Asset Being Classified as a Long-Term Capital Asset

Classifying an asset as a long-term capital asset offers several tax advantages:

• It qualifies for indexation benefits, where the purchase price is adjusted for inflation, effectively lowering the taxable capital gains.
• Taxpayers gain access to specific exemptions under the Income Tax Act, such as those available under Sections 54, 54EC, and 54F, which apply exclusively to long-term assets.
• For land and buildings, effective 23rd July 2023, taxpayers can choose to pay tax at 12.5% without indexation or 20% with indexation, opting for whichever method results in lower tax liability.

Conditions for Claiming the Exemption

1. Purchase or Construction Timeline: Purchase a new house within 1 year before or 2 years after the date of sale, or Construct a new house within 3 years of the sale.
2. Deposit in Capital Gains Account Scheme (CGAS): If the gains are not utilised before the income tax return filing due date, the unutilised amount must be deposited in a CGAS account to remain eligible for exemption.
3. Holding Period: The new property must be held for at least 3 years. If sold before this period, the exemption claimed will be reversed and taxed.

Example

Suppose you sell your residential flat in April 2025 for ₹1.2 crore, with a cost of acquisition of ₹60 lakh. The indexed long-term capital gain is ₹40 lakh.

• If you purchase another flat for ₹50 lakh within two years, you can claim a full exemption of ₹40 lakh, as the entire gain is reinvested.
• If you only reinvest ₹30 lakh, the balance ₹10 lakh will be taxable as long-term capital gain.

Also Read: ITR Filing FY25: Is Capital Gain from Ancestral Property Taxable in India?

Conclusion

Section 54 can help save substantial tax on capital gains, but strict timelines and reinvestment conditions must be followed. Using a capital gains calculator can help you estimate exemptions and plan better. Consulting a tax professional ensures compliance and maximum savings.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.