Income Tax Deduction: Along with collecting tax from its taxpayers, the Income Tax Act also gives them the opportunity to avail various tax exemptions. One such law is Section 54 under which tax exemption is given on the profit amount on selling an old house and buying or constructing a new one. The tribunal has recently given a big decision regarding this rule, which is important for everyone to know.
Tax is such a trap in which a slight mistake can cause a loss of lakhs. There are many people in the country who sell their old house and buy a new one or get a new house built at another place. Now everyone knows that you get a higher price on selling an old house, which is in the form of profit.
If you have made a profit, then you have to pay tax on it as well. But, the income tax law also gives you a chance to save tax, if you sell the old house and build or buy another residential house. However, for this you will have to keep in mind some deadlines and rules. If you are not aware of this rule and you miss it, then you may have to pay tax of lakhs of rupees.
In fact, under Section 54 of the Income Tax Act, there is a provision to give tax exemption on the profit made on selling the old house and buying or building another house. Recently, the Income Tax Appellate Tribunal (ITAT) has said in a decision that while claiming tax exemption under Section 54, the taxpayer should keep in mind when he bought or built the house. If it is not within the prescribed limit of the Income Tax Act, then tax exemption will not be given. The point to note here is that the time for tax exemption will be calculated from the possession of the house and not from its agreement.
What does section 54 say?
Under section 54 of Income Tax, if you have sold an old house, then the difference between its old price and the current price will be considered as profit in the form of long term capital gain. Actually, LTCG tax should be levied on this, which is 20% of the total amount and if we consider 4% cess on it, then it will be 20.8%. Long term is the period when a property is kept with you for 24 months or more and then sold.
Understand with an example: Suppose you bought a house in 2020, then its value was Rs 40 lakh and sold it in 2024 for Rs 50 lakh. In this way you kept the property with you for 4 years. Therefore, the profit of 10 lakhs on selling it will be considered as your long term capital gain and 20.8 percent LTCG tax will have to be paid on it. But, if you sell this house and buy or build another residential house, then under section 54 you will be given the benefit of tax exemption and the entire amount of profit will be tax free.
What to keep in mind for exemption
From the above example, you must have understood the tax levied on your profit. Now we tell you the math of saving this tax. As it is written in section 54 of Income Tax and recently ITAT has also said in its decision that if you have bought a new house one year before selling the old house, even if it is under construction, then you will not have to pay tax on the profit from the old house.
But, it is important that the period of buying a new house should be within exactly one year (365 days) from selling the old house. Apart from this, even if you buy a new house within 2 years of selling the house, you will still get exemption from paying LTCG tax under section 54.
Now in the second situation where you want to build a house yourself instead of buying it. In such a situation it is necessary that you have to get another new house built within 3 years from the date of selling the old house. Only then will you be given the benefit of tax exemption under section 54. The tribunal has clearly said that buying a house means its possession. That is, if you are buying, then buy such a house which gives you possession within 2 years and if you are getting it built, then complete it within 3 years at any cost, only then will you get exemption.
Why did the tribunal give this decision?
Income Tax Appellate Tribunal received a case of an NRI couple in which the Income Tax Department had imposed tax and penalty on Rs 36 lakh. The couple sold a house on 10 February 2011. As per the rules, they had to buy a house a year ago i.e. after 11 February 2010 or buy a new house before 9 February 2013. But, the Income Tax Department saw that the couple had made an agreement with the builder to buy a new house on 25 July 2009. On this, the department imposed a hefty penalty along with tax. But, the tribunal said in its decision that for tax exemption, possession should be considered and not the agreement, which in this case was given on 2 February 2011. Therefore, the couple was considered eligible for tax exemption under section 54.
