Capital gains exemptions from income tax

 Any profits or gains arising from the transfer of the following assets are exempt from tax and they will not include in the income of the assessee for tax purposes.

Capital gains arising on the transfer of property used for residence:- under section 54 of income tax act, any capital gain arising on the transfer of a house or land appurtenant thereto is exempt subject to the following conditions.


  • The building is owned by the individual or Hindu undivided family.
  • Such property was being used as residential house.
  • The income of such property is chargeable under the head income from house property.
  • The exemption will be available only in relation to a house property which had been held is the tax-payer for a period exceeding 36 months before transfer.
  • The assessee has within the period of 1 year after the day of transfer constructed a residential house.

Quantum of exemption: - the capital gains arising from the transfer of such residential house is exempt to the extent of the cost of new residential house purchased or constructed.

Where the amount of capital gain is not utilized by the assessee for acquisition of new home before the due date for furnishing the return of income under section 139 of income tax act, if it is deposited by him on or before the due date of furnishing the return of income in an account opened under the capital gain account scheme, 1988, with specified bank authorized by the central government in accordance with the scheme, he will be entitled for exemption.

Withdrawal of exemption and tax on sale of new house: - if the new house either purchased or constructed is transferred with in a period of three years of its purchase or construction, the exemption given earlier will be withdrawn. The old exemption capital gain and new capital gains arising on the transfer of new residential house shall be treated as short term capital gains and chargeable to tax as the income of the previous year in which the new residential house is transferred.

Tax on unutilized amount: - if the amount deposited is not utilized fully for acquiring the new house within the period of 3 years from the date of transfer of original house, the amount not so utilized shall be treated as long term capital gain of the previous year in which the period specified expires. The tax payer shall be entitled to withdraw such amount in accordance with the scheme.

Effect of capital gains account scheme: - the effect of the new scheme for deposits is that if the assessee cannot utilize the capital gain for acquisition of new house on or before the due date for furnishing the return of income, he may deposit it under this scheme up to the aforesaid date in order to avail this exemption. After such deposit he may utilize the deposit for acquiring the new house with in 3 years from the date of transfer of the old house.

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