By selling the house property, it is only the profit earned by the individual on sale of the property that is taxable.
When an individual sells a residential property and buys another residential property, he will be eligible for exemption under Section 54. Conditions to avail the benefit of exemption under Section 54 includes:
The taxpayer (ie. seller) needs to be an individual or HUF. Thus, firms, LLP’s and companies cannot utilize the benefits of this section.
Asset needs to be classified as a long-term capital asset.
The asset sold is a Residential House. Income from such a house should be chargeable as Income from House Property
The seller should purchase a residential house either 1 year before the date of sale/transfer or 2 years after the date of sale/transfer. In case the seller is constructing a house, the seller has an extended time, ie. the seller will have to construct the residential house within 3 years from the date of sale/transfer. In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional compensation)
The new residential house should be in India. The seller cannot buy or purchase a residential house abroad and claim the exemption.
The above conditions are cumulative. Hence, even if one condition is not fulfilled, then the seller cannot avail the benefit of the exemption under Section 54.
The amount of exemption under Section 54 of the Income Tax Act for the long-term capital gains will be the lower of:
Capital gains arising on transfer of residential house.
or
investment made in purchase or construction of a new residential house property. Hence, the balance capital gains (If any) will be taxable.
