Two Houses, One Land Sale: House Property Loss, Section 50C and the 54F Trap
Mr Raghav, aged 48, is a resident individual working as a plant manager in Chennai. His salary for FY 2024-25 is ₹18,00,000. He owns two residential houses in Chennai. House A is occupied by his family throughout the year and carries no loan. House B, bought in 2017 with a housing loan, was let out throughout the year at ₹35,000 per month. Municipal taxes of ₹40,000 on House B were paid by him, and interest on the House B loan for the year is ₹4,20,000. On 12 November 2024 he sold a plot of land at Coimbatore for ₹1,20,00,000. The plot was purchased in June 2014 for ₹28,00,000. The stamp duty value on the date of sale was ₹1,25,00,000, and the buyer paid stamp duty on that value. Raghav has no other capital gains and no brought-forward losses. He plans to buy a residential flat at Chennai in March 2027 out of the sale proceeds and wants exemption under section 54F. Assume the cost inflation index for FY 2014-15 is 1024 and for FY 2024-25 is 363.
1. Compute Raghav's income from house property for FY 2024-25 and explain how the result on House B interacts with his salary income.
Read the worked answer
House A - self-occupied
Annual value is taken as nil under section 23(2). No interest is claimed on House A, so nothing is deductible and the income is nil.
House B - let out throughout the year
| Particulars | ₹ |
|---|---|
| Gross annual value (35,000 × 12) | 4,20,000 |
| Less: municipal taxes actually paid by the owner | (40,000) |
| Net annual value | 3,80,000 |
| Less: standard deduction at 30% of NAV | (1,14,000) |
| Less: interest on borrowed capital (let-out property, hence no ₹2,00,000 cap) | (4,20,000) |
| Income / (loss) from House B | (1,54,000) |
Set-off
Section 71 allows the loss to be set off against salary, but section 71(3A) caps the set-off of house-property loss against other heads at ₹2,00,000 in a year. The loss of ₹1,54,000 is below the cap, so the entire amount is absorbed against the salary of ₹18,00,000 in FY 2024-25. Nothing is carried forward.
The judgement point is that the ₹2,00,000 ceiling is not a cap on interest; it is a cap on inter-head set-off. Full interest on a let-out house is deductible in computing house-property income; the ceiling bites only when the result is a loss being set against salary or other heads.
2. Compute the capital gain on the land under each option available to Raghav and advise which he should adopt. Deal with the stamp duty value point.
Read the worked answer
Nature of the gain
The plot was held from June 2014 to November 2024, far beyond 24 months, so the gain is long-term.
Which rate regime applies
The transfer is on 12 November 2024, i.e. on or after 23 July 2024, and the land was acquired before that date. A resident individual transferring land or building acquired before 23 July 2024 may choose between (a) 12.5% without indexation and (b) 20% with indexation. Raghav must compare both.
Option A - 12.5% without indexation
Sale consideration 1,20,00,000 − cost 28,00,000 = 92,00,000. Tax at 12.5% = ₹11,50,000.
Option B - 20% with indexation
Indexed cost = 28,00,000 × 363/1024 = ₹9,92,578. Gain = 1,20,00,000 − 9,92,578 = 1,10,07,422. Tax at 20% = ₹22,01,484.
Advice: Option A saves about ₹10,51,484 and should be adopted.
Stamp duty value (section 50C)
Where the stamp duty value exceeds consideration, the difference is ignored if it does not exceed 10% of consideration. Here the difference is ₹5,00,000, which is 4.17% of ₹1,20,00,000. Section 50C is therefore not triggered and consideration remains ₹1,20,00,000 in both options.
Note also that indexation is not available under Option A, so the choice is not about "which gives a higher cost" but about which produces the lower tax; with a 2014 cost base the indexation benefit does not compensate for the doubling of the rate.
3. Can Raghav claim exemption under section 54F for the flat he intends to buy in March 2027? Advise him on what he would need to have done differently.
Read the worked answer
Conclusion: No. Section 54F fails on two independent grounds.
Ground 1 - he owns more than one residential house on the date of transfer
The proviso to section 54F(1) denies the exemption where, on the date of transfer of the original asset, the assessee owns more than one residential house other than the new asset. On 12 November 2024 Raghav owned House A and House B. Two houses means the exemption is not available at all, irrespective of how the money is used.
Ground 2 - the timing of the purchase
Section 54F requires purchase within one year before or two years after the date of transfer, i.e. by 12 November 2026 (or construction within three years, by 12 November 2027). A purchase in March 2027 is outside the two-year window for purchase and would also have to be tested against the construction window.
What he should have done
- Transfer House B (or House A) before 12 November 2024, so that on the date of transfer he owned only one other residential house.
- Buy the flat by 12 November 2026, or construct within three years.
- If the flat is not purchased before the due date for filing the return under section 139(1), deposit the net consideration in the Capital Gains Accounts Scheme before that date and utilise it within the statutory period, failing which the unutilised amount is taxed as LTCG of the year in which the period expires.
He should also note that section 54F exempts the gain in the proportion of amount invested to net consideration, not the whole gain automatically.