Query regarding Income Tax section 54 Capital Asset is Residential Flat acquired through Gift Deed from Family member 5 years ago. Now the Gifted Flat is sold and with in 6 months New Residential Property of value equal to LTCG is purchased in India. Under section 54 , above GIFTED Property qualifies for LTCG tax exemption or not?? Is section 54 applicable for CAPITAL ASSET acquired through GIFT or GIFTED asset is not eligible for exemption under section 54??

Ans: You have raised a very relevant point. The fact that the residential flat came to you through a Gift Deed does not, by itself, stop you from claiming exemption under Section 54.

» Gifted Residential Property Can Qualify

– Section 54 is concerned mainly with the nature of the property sold, the nature of the capital gain and compliance with the conditions for reinvestment.

– There is no general condition in Section 54 saying that the residential house must have been originally purchased by you from your own money.

– Therefore, a residential flat received through a valid Gift Deed can qualify.

– Receiving the property as a gift and later selling it are two different tax events.

– So, merely because the flat was gifted by a family member, Section 54 exemption does not get denied.

» Your Case Appears to Meet the Basic Requirement

Based on the facts mentioned:

– You received a residential flat through a Gift Deed from a family member.

– You have held the gifted flat for 5 years.

– You have now sold the residential flat.

– Within 6 months, you purchased another residential property in India.

These facts broadly support a Section 54 claim, subject to the other conditions being satisfied.

» Long-Term Capital Asset Condition

For Section 54, the property sold should result in a Long-Term Capital Gain.

In your case, you have personally held the property for around 5 years. So, based on the information given, the residential flat is already a long-term capital asset.

There is another useful rule for gifted properties.

– For determining the holding period of an asset received through gift, the period for which the previous owner held the property is also generally considered.

– So even in some cases where the recipient has held the gifted property for a shorter period, the donors holding period can become important.

In your case, however, the 5-year holding period itself makes the LTCG position fairly clear.

» How Cost of Acquisition Works for a Gifted Property

Another common doubt is whether the acquisition cost becomes Nil because you received the flat without paying for it.

Normally, no.

For a property received by gift:

– The cost of acquisition to the previous owner is generally considered as your cost for capital-gains purposes, subject to the applicable tax provisions.

– Therefore, you should preserve the donors original purchase documents.

– If the property has a much older ownership history, the relevant provisions for properties acquired before 1 April 2001 may also need to be examined.

This cost is relevant for calculating your actual LTCG before looking at Section 54 exemption.

» Important Point About How Much You Need to Reinvest

There is one important clarification in your question.

You mentioned that the new residential property value is equal to the LTCG.

Under Section 54, exemption is broadly linked to the amount of LTCG and the amount invested in the eligible new residential house.

So, if the eligible investment in the new residential house is equal to or more than the LTCG, the entire eligible LTCG can generally be exempt, subject to the conditions and statutory limits.

You do not necessarily have to reinvest the entire sale consideration for Section 54.

This distinction is important because people sometimes confuse Section 54 with other capital-gain exemption provisions.

» Six-Month Purchase Is Within the Permitted Period

You mentioned that the new residential property was purchased within 6 months of selling the gifted flat.

That is well within the normal purchase window under Section 54.

Broadly, the new residential house can be:

– Purchased within 1 year before the sale of the old residential house, or

– Purchased within 2 years after the sale, or

– Constructed within 3 years after the sale.

So, a purchase within 6 months after sale fits comfortably within the normal time requirement.

» New House Should Be in India

You have specifically mentioned that the new residential property is in India.

That is important because the current Section 54 provision requires the new residential house to be situated in India.

So this condition also appears to be satisfied from the facts given.

» Be Careful About Selling the New Property Too Soon

There is another condition which is sometimes missed.

After claiming Section 54 exemption, selling the newly acquired residential house within the specified 3-year period can have adverse tax consequences.

Therefore, the new house should ideally not be sold without first checking the Section 54 impact.

Tax planning should not stop immediately after claiming the exemption. Future sale timing also matters.

» Documents You Should Keep

Since the original property came through gift, keep the complete ownership trail.

– Gift Deed.

– Donors original purchase agreement/deed.

– Evidence of donors acquisition cost.

– Your sale deed for the gifted flat.

– New property purchase agreement.

– Registration and stamp-duty documents.

– Bank statements showing payments.

– Evidence of eligible expenses connected with acquisition or transfer.

– Documents showing the date of possession, where relevant.

These records can become very useful if the exemption is later questioned.

» One More Tax Point

Receiving a property as a gift from a qualifying relative is generally covered by the gift-tax provisions applicable to gifts from relatives.

But this should not be mixed up with Section 54.

The tax position when you originally received the property and the capital-gains exemption when you later sell the property are separate issues.

Even if the original gift was exempt, the later sale can still create capital gains. Section 54 can then be examined against that LTCG.

» Final Insights

Yes. Based on the facts provided, a residential flat acquired through a valid Gift Deed can qualify for Section 54 exemption.

The simple fact that you did not originally purchase the old flat yourself does not make it ineligible.

In your case, the key positives are:

– The asset sold is a residential flat.

– You held it for about 5 years.

– The sale therefore appears to result in LTCG, subject to the complete facts.

– You purchased another residential house in India within 6 months.

– If the eligible cost of the new house is equal to or higher than the LTCG, the LTCG can generally be fully covered by Section 54, subject to the applicable conditions and limits.

Before filing the return, get the Gift Deed, donors original acquisition documents, sale deed and new property documents checked by your CA. This will help establish both the correct cost of acquisition and the Section 54 exemption properly.

Best Regards,

K. Ramalingam, MBA, CFP,

AMFI-Registered MFD – ARN 4188

www.holisticinvestment.in

https://www.linkedin.com/in/ramalingamcfp/