The restriction of investment in one residential house only for claiming capital gains exemption under Section 54 of the Income Tax Act, 1961 has been partially relieved by the Finance Act, 2019, as the taxpayers have been allowed with an option to purchase or construct two residential houses in India for claiming such tax benefit, applicable from FY 2019-20/ AY 2020-21 and onwards. However, this relaxation shall be available to all taxpayers as a one time benefit u/s 54 provided the amount of the capital gain does not exceed Rs. 2 crore.
As a result, the scope of benefit of rollover of capital gains u/s 54 has been extended from investment in one residential house property to two residential house properties for a tax payer having capital gains up to Rs. 2 crore, as a one time measure, i.e. this benefit can be availed once in a life time and once the assessee avails this option, he will not be eligible to exercise this option again in any subsequent assessment years.
For the purpose, Section 54 of the Income Tax Act, 1961 has been amended vide Section 6 of the Finance Act 2019, applicable from FY 2019-20/ AY 2020-21 and onwards, as under:
“In section 54 of the Income-tax Act, in sub-section (1), after clause (ii), the following provisos shall be inserted with effect from 01/04/2020, namely:-
‘Provided that where the amount of the capital gain does not exceed two crore rupees, the assessee may, at his option, purchase or construct two residential houses in India, and where such option has been exercised,-
(a) the provisions of this sub-section shall have effect as if for the words “one residential house in India”, the words “two residential houses in India” had been substituted;
(b) any reference in this sub-section and sub-section (2) to “new asset” shall be construed as a reference to the two residential houses in India:
Provided further that where during any assessment year, the assessee has exercised the option referred to in the first proviso, he shall not be subsequently entitled to exercise the option for the same or any other assessment year.”
Accordingly, from FY 2019-20/ AY 2020-21 and onwards, the long-term capital gains arising from sale of residential house property shall be exempt u/s 54 to the extent such capital gains are re-invested in purchase/ construction of two residential house properties in India, by an Individual or HUF.