According to the Income Tax Department's explanation of Section 54EC of the Income-tax Act, 1961, taxpayers can claim exemption when capital gains arise from transfer of long-term capital assets like land or buildings, provided they invest in specified assets within six months of the transfer date. However, investment in such specified assets cannot exceed ₹50 lakh during a financial year. As reported by Tax2win, this limit applies to investments made from capital gains arising from the transfer of one or more original assets during the financial year of transfer and the subsequent financial year.
For inherited properties, the previous owner's holding period is also considered while determining whether the asset qualifies as a long-term capital asset. According to the Income Tax Department, the cost of acquisition is generally determined with reference to the previous owner's cost as per applicable tax provisions. This means that when selling inherited properties, taxpayers must consider the original owner's holding period and acquisition cost to determine the long-term capital gains treatment.
A taxpayer who inherited two flats through a will from a relative recently asked whether both properties could be sold in the same financial year for a combined consideration of ₹60 lakh and whether the entire taxable gain could be invested in eligible capital gains bonds. As explained by CA Abhishek Soni, CEO and Co-founder of Tax2win, an individual can sell both inherited properties in the same financial year, but the exemption available under Section 54EC is capped at ₹50 lakh in a financial year. This means that any taxable long-term capital gain beyond the eligible Section 54EC investment limit will remain taxable unless the taxpayer claims exemption under another applicable provision.
Taxpayers may explore exemption under Section 54 of the Income-tax Act, 1961, which applies when long-term capital gains arise from transfer of a residential house and the taxpayer purchases or constructs another residential house in India within specified timelines. According to the Income Tax Department, the exemption is available to the extent of the amount invested in the new residential house, subject to conditions prescribed under Section 54. The asset sold must be a long-term capital asset being a residential house in India, and the taxpayer must purchase another residential house within one year before or two years after the date of transfer, or construct a residential house within three years from the date of transfer.
