What are the income tax deductions in Section 54?

Section 54 of the Income Tax Act in India provides provisions for claiming deductions on capital gains arising from the sale of a residential property if the proceeds are reinvested in purchasing or constructing another residential property. This section is primarily relevant for individuals looking to save on capital gains tax when they sell one property and invest in another. It helps in promoting investments in real estate.

Here are the key points and deductions allowed under Section 54:

1. Eligibility: The individual should have made a long-term capital gain from the sale of a residential property.
2. Type of Property: The property sold should be a residential property. The property acquired as a replacement should also be a residential property.
3. Timeframe for Investment: The individual must invest the capital gains in purchasing or constructing another residential property within a specific timeframe to claim the deduction:
   1. Purchase: The new property must be purchased within 1 year before or 2 years after the sale of the original property.
   2. Construction: If an individual plans to construct a new residential property, it must be done within 3 years from the date of the sale of the original property.
4. Amount of Deduction: The amount of deduction under Section 54 is the lower of either:The amount of capital gains arising from the sale of the original residential property, orThe amount invested in the new residential property.

It’s important to note that if the entire capital gains amount is invested in the new property, the entire amount of capital gains is exempt from tax. However, if only a portion of the capital gains is invested, then only that portion is exempted from tax.