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Shankar Duraiswami   04 November 2023

Capital gains on sale of long term fixed assets - set off against purchase of residential property

In aspect of setting off the Capital  Gains by sale of Long Terms Fixed Asset other than a residential property, when the seller buys a residential property, on sale of residential plots  land,  would the entire amount of Capital Gains be setoff under S 54 or only prorata  basis under S 54F. 

What is the section applicable when the seller has no residential property at the time the plot of land was sold, and buys his first residence from the sale.

The  Sale value of the land  and the value of capital gains,  is more than the value of the residential property bought.


 2 Replies

Rama chary Rachakonda (Secunderabad/Telangana state Highcourt practice watsapp no.9989324294 )     06 November 2023

  • Step 1: Start with the full value of consideration
  • Step 2: Deduct the following: Expenditure incurred wholly and exclusively in connection with such transfer Indexed cost of acquisition Indexed cost of improvement
  • Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B

T. Kalaiselvan, Advocate (Advocate)     08 November 2023

Section 54 focuses on long-term capital gains derived from the sale of a residential property. Contrarily, Section 54F caters to long-term capital gains obtained from the sale of any asset other than a residential property. If these gains are reinvested in a new residential property, tax benefits can be claimed.

Much like Section 54, the exemption amount is determined by the lower value between the capital gains or the investment made in the new property.

The key condition to avail of the tax benefits under Section 54F is to reinvest the proceeds from the sale or transfer of an asset in a new residential property. This reinvestment should take place either one year before the sale of the asset or two years (for purchase) or three years (for construction) after the sale. It applies to long-term capital assets, i.e., assets held for more than 24 months, with the exception of real estate, where the holding period is 36 months. This provision can be applied to all capital assets other than residential property, such as gold, equity shares, and non-residential property.

Indexation is a technique that takes into account inflation from the time you bought the asset to the time you sell it. It adjusts the purchase price of the investment, which reduces the total taxable capital gain amount.

To avail the benefit of indexation, you need to calculate the indexation factor based on the Consumer Price Index (CPI). The Central government releases these indices each year. The indexed cost of acquisition is calculated as:

Indexed Cost of Acquisition = Cost of Acquisition * (CPI of the year of sale/CPI of the year of purchase)

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