Section 54F of the Act only mandates that the capital gain should be invested in ‘a residential house’ within the stipulated time by way of purchase or construction. Thus, the amount spent on renovation of such residential house by an assessee according to his requirements is also allowable as exempt u/s.54F of the Act as it would amount to construction of a residential house.
2) no need to demolish existing house
Section 54F
Dear Legal Brains, Based in Tamil Nadu, I purchased a residential house property (land + two storey building) in Dec 2022 to offset capital gains from sale of land u/s 54F in Apr 2023. While not uninhabitable, the building has required significant renovation in terms of compound wall, flooring, electrical, plumbing and roofing repairs. I am also adding a third floor to this building. Renovation begin Jan 2023 which I hope to complete by Dec 2023. I have some photos of the original condition of the property which highlight the need for repairs in terms of the compound wall and such. My query is to determine if 54F will allow me to claim not only the purchase cost of the original house property but also all costs associated with renovation of the property. My query is two fold : 1. to determine if 54F will allow me to claim not only the purchase cost of the original house property but also all costs associated with renovation of the property. 2. I had originally intended to only obtain a revised building plan showing the modifications such as the addition of a third floor. However, my accountant is advising that the only bulletproof way to avoid tax litigation u/s 54F is to first try and obtain a demolition permit from local municipal authorities showing demolition of original house and then obtain a building plan showing the completed, renovated house as an entirely new construction. Do I really need to go this far ?
Asked 2 years ago in Property Law
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5 Answers
the amount spent on renovation of such residential house by an assessee according to his requirements is also allowable as exempt u/s 54f
1. The portion of the sale proceeds that you invest in the house property decides how much money will be exempt from tax. If the total amount of the sale proceeds is invested in the property, the entire capital gains will be exempt from tax under section 54F of the Income Tax Act.
One among the principal conditions to claim exemptions under section 54F is :
The residential house property purchased by you by using the sale proceeds must not be transferred or sold for a span of 3 years with respect to the purchase date or the date of completion of construction.
The property you have purchased requires modification/renovation and the expenses involved for that will be covered under the investment for purchase of new residential property. Thus, the amount spent on renovation of such residential house by an assessee according to his requirements is also allowable as exempt u/s. 54F of the Act as it would amount to construction of a residential house.
2. As per the above guidelines, the advise to demolish and reconstruct the existing structure may not be proper, you may not have to follow such misleading advises.
You can claim both purchase and renovation cost. You don’t have to go far till demolition
Dear Client,
Eligibility of Renovation Costs under Section 54F:
Section 54F provides for exemption of capital gains if the proceeds from the sale of a capital asset (like land) are invested in purchasing a residential house property. The key requirement is that the new property must be purchased within the specified period, and construction must be completed within the specified period.
Generally, under Section 54F, the exemption is available for the cost of the new house property. The renovation costs might not be explicitly covered, but the situation can be complex.
Renovation vs. Demolition and Reconstruction:
While obtaining a demolition permit and then reconstructing the house as a new construction might provide greater clarity and potentially minimize the risk of tax litigation, it might not always be necessary in every situation.
Each case can be unique, and the specific circumstances, and tax laws can influence the approach that should be taken.
