Final Up to date on August 27, 2025 at 9:43 am
In a earlier article, we highlighted the widespread mistake made by many whereas claiming capital achieve exemption underneath Part 54 and Part 54F – Claiming Capital Positive aspects Exemption? Watch Out for This Widespread Slip. On this article, we will deep-dive into how a lot one ought to make investments to say capital achieve tax exemption underneath Part 54 of the Revenue Tax Act, 1961.
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What’s Part 54?
As you’re conscious by now, Part 54 supplies an exemption if the ‘capital positive factors’ arising from the sale of residential property are invested in one other residential property, topic to assembly sure circumstances.
The quantity of capital positive factors to be invested is the distinction between the Sale Worth and the Value Worth, as per the Revenue Tax Act. Nevertheless, for property purchases made earlier than twenty third July 2024 and transfers made on or after twenty third July 2024, the resident particular person has the choice to calculate capital positive factors with or with out indexation. Indexation is adjusting the property’s value value to account for inflation as much as the date of sale. If one calculates the achieve with out inflation, the tax charge is 12.5% whereas if indexation is factored in, the tax charge is 20%. Training cess and surcharge, if relevant, are over and above this.
Allow us to take an instance to know.
Mr. X has bought his residential property for Rs. 1 Crore in August 2024. This property was bought for Rs. 25 Lakhs in August 2004. Primarily based on the inflation index revealed by the Revenue Tax division, the index value value for the property involves Rs 80.31 Lakhs.
Now, Mr. X has an choice to decide on one of many two strategies to calculate the capital achieve quantity and pay the capital achieve tax.
| Choice 1: With out Indexation | Choice 2: With Indexation | |
| Sale Worth | 1,00,00,000 | 1,00,00,000 |
| Value / Listed Value Worth | 25,00,000 | 80,30,973 |
| Capital Acquire Quantity | 75,00,000 | 19,69,027 |
| Tax Charge | 12.5% | 20.0% |
| Tax Legal responsibility | 9,37,500 | 3,93,805 |
As is clear, Choice 2 is useful for Mr. X because the tax legal responsibility is much less.
The place does the confusion come up?
Mr. X decides to benefit from Part 54 by investing in one other residential property. To avail the profit, he wants to speculate the ‘capital achieve quantity’. Now Mr. X is confused, which capital achieve quantity must be thought-about: Rs 75 Lakhs as proven in Choice 1 or Rs. 19.69 Lakhs as proven in Choice 2? Since Mr. X tax legal responsibility was calculated foundation Choice 2, he assumed that Rs. 19.69 Lakhs wanted to be invested to say the tax profit.
Nevertheless, he’s incorrect. As per the Revenue Tax Act, Choice 1 and Choice 2 are given solely to calculate the tax legal responsibility and pay the tax accordingly. If one is planning to take exemption underneath part 54, the indexation profit isn’t obtainable, and the capital achieve quantity, as decided by Sale Worth much less Value Worth (as per Choice 1) must be reinvested to say tax advantages. In our instance, Mr. X must make investments Rs. 75 lakhs in one other residential profit, to keep away from fee of Rs. 3.93 Lakhs as taxes!!
Key takeaways:
The readers ought to bear in mind the next factors:
- If one goes to pay the tax, they should pay the tax, which is the decrease of Choice 1 and Choice 2.
- If one is planning to benefit from Part 54 and save tax, they should calculate the quantity to be invested as per Choice 1 solely.
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