Section 54 benefits available on house built on contiguous plots: Experts

If adjacent apartments are purchased from a developer, make the modifications to convert them into one unit

Recently, the Income-Tax Appellate Tribunal (ITAT), Delhi, ruled in favour of a person whose father had sold his old house and used the proceeds to purchase three adjacent plots on which he built a large house in Gurgaon that could accommodate his entire family. Under Section 54 of the Income-Tax (I-T) Act, tax exemption is permissible on the purchase of ‘a residential property’. The point of contention in this case was whether a house built on three plots (which, in fact, has three residential units but within a single compound wall) is eligible for Section 54 deduction. The tax authorities were of the view that exemption should be allowed on only one of the three. The ITAT, however, allowed the exemption on the entire house.

Benefit under Section 54 

When a person sells his house property, he makes capital gains. 

Suvigya Awasthy, associate partner, PSL Advocates & Solicitors says, “Section 54 provides relief to a taxpayer who sells his residential house and from the sale proceeds acquires another residential house.” The capital gain from the sale of the old house is exempted from taxation. 

Maneet Pal Singh, partner, I.P. Pasricha & Co says, “Only individuals or Hindu Undivided Families (HUFs) are eligible to claim this benefit. The property sold must be a long-term capital asset and the property purchased must be in India.”  

Amendment to Section 54

Earlier, Section 54 allowed exemption on the purchase or construction of one house property only. Ashutosh K. Srivastava, senior associate, SKV Law Offices says, “The Finance Act, 2020, amended Section 54 to extend the benefit of exemption on investment made in two residential house properties.” This option can be exercised by the taxpayer only once in his lifetime, and the long-term capital gain shouldn’t exceed Rs 2 crore. This amendment came into effect from assessment year 2021-22. The above-mentioned case relates to a period before this amendment came into effect.

Implications of the judgment 

What the ITAT judgment has once again reinforced is that a homebuyer can claim Section 54 exemption even if he builds a house by purchasing multiple plots.

Srivastava says, “The principle of multiple residential houses/units holds good so long as these units are in the same physical location and are contiguous to each other and are used as a single residential unit.” 

Aditya Chopra, managing partner, Victoriam Legalis - Advocates & Solicitors, adds that Section 54 exemption will be available even if the contiguous land is contained in a separate title. 

According to experts, Section 54 exemption can also be claimed in case of two adjacent flats in an apartment complex, or a house having multiple independent floors built on a single plot.  

Exercise caution

While homebuyers should make the most of the various favourable judgements relating to multiple plots and units (including by several High Courts), they should be mindful of a few points. If they purchase separate plots, these must be contiguous to one and another.  

Awasthy says, “If the assessee fails to purchase contiguous residential plots, the benefits of Section 54 will not be available.” 

In such a case, the homebuyer may get the benefit of tax exemption on only one of the plots. So, he would have to pay tax on a considerable portion of the capital gains from the sale of his earlier property.

The onus of proving that the purchased property is a single house lies on the buyer. Jain says, “Papers submitted for getting building plans sanctioned by the local authorities can be good evidence. The buyer should also ensure that no delineations remain after the construction of the property.” 

In case two vertically or laterally adjacent units are purchased from a developer, the buyer should ask the latter to make modifications internally and convert them into a single residential house.

This exemption is only available if you purchase or construct a residential house within a stipulated time period. Srivastava says, “If a person is unable to construct or purchase a new property within the stipulated period, he should deposit the capital gains under the Capital Gains Account Scheme in any public sector bank to avail of this exemption.”