Section 54F of the Income Tax Act: A Guide to Exemptions on Capital Gains
Taxation forms a significant part of any country’s financial framework, playing a pivotal role in the development and growth of the nation. Among the various forms of taxes, Income Tax holds considerable importance.
Capital gain is a type of income that arises when a capital asset is sold. It is the difference between the purchase price (known as the cost of acquisition) and the sale price of an asset. When such gains are significant, they can lead to substantial tax liability. Fortunately, the Income Tax Act provides provisions for claiming exemptions on such gains, one of them being Section 54F.
Section 54F is an essential provision of the Income Tax Act that allows taxpayers to claim exemption on long-term capital gains arising from the sale of any long-term capital asset, provided they invest in a residential house. This section serves a dual purpose – it promotes real estate investment and provides relief to taxpayers from hefty capital gain tax charges.
Deep Dive into Section 54F
Understanding the nuances of Section 54F requires getting familiar with some key terms:
- Long-term capital asset: As per the Income Tax Act, a long-term capital asset is an asset that is held by an individual for more than three years. However, certain assets like equity shares, preference shares, debentures, etc., held for more than 12 months, are also considered long-term capital assets.
- Net consideration: The ‘net consideration’ refers to the sale price of the asset being sold, reduced by any expenditure incurred exclusively in connection with the transfer. In simpler terms, it’s the amount you receive after selling your asset, after accounting for any associated costs.
The crux of Section 54F revolves around the concept of reinvesting the net consideration from the sale of an original asset into a new residential house. The ‘original asset’ here refers to any long-term capital asset that is not a residential house, while the ‘new asset’ implies the residential house that the assessee purchases or constructs using the sale proceeds.
Eligibility for Exemption Under Section 54F
To avail the exemption under Section 54F, an individual must satisfy the following conditions:
- The assessee: The individual claiming exemption should be an individual assessee, i.e., a person or a Hindu Undivided Family (HUF).
- Long-term capital asset: The asset transferred should be a long-term capital asset. Remember, the duration for long-term varies between types of assets.
- Investment in residential house: The assessee should invest the net consideration in purchasing or constructing a residential house. The purchase should be made either one year before or two years after the date of transfer of the original asset. In the case of construction, it should be within three years after the date of transfer of the original asset.
Restrictions and Limitations
Despite its many advantages, Section 54F imposes certain limitations:
- The benefit of Section 54F is not available if the assessee, on the date of transfer of the original asset, owns more than one residential house apart from the new asset.
- The exemption becomes void if the assessee purchases any residential house other than the new asset within a period of one year after the date of transfer of the original asset or constructs any residential house other than the new asset within a period of three years after the date of transfer of the original asset.
Amendment to Section 54F in Finance Act, 2023
The Finance Act, 2023 has introduced a new amendment to Section 54F of the Income Tax Act. As per this amendment:
“Provided further that where the cost of new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of this sub-section.”
This essentially implies that if the cost of the new residential property purchased or constructed exceeds INR 10 crores, the amount exceeding INR 10 crores will not be considered for exemption under Section 54F.
Let’s understand this with an example:
Example: Assume you sold a non-residential property (the original asset) for INR 15 crores, resulting in a long-term capital gain. Now, if you invest all of the proceeds (INR 15 crores) in a new residential house (the new asset), the cost of the new asset for the purposes of calculating exemption under Section 54F would be limited to INR 10 crores only. This means that the capital gains corresponding to the INR 5 crores (amount exceeding INR 10 crores) would be subject to tax.
This amendment is designed to prevent potential misuse of Section 54F by ultra-high net-worth individuals for tax evasion purposes. It promotes fair tax practices and broadens the tax base by limiting the maximum exemption available under this section to the cost of a new residential house up to INR 10 crores.
This amendment has come into effect from the financial year 2023-24 onwards, and you must consider it while planning your taxes and investments.
Capital Gains Account Scheme (CGAS)
Now that we’ve taken a closer look at the concept of long-term capital assets and net consideration, it’s time to understand the Capital Gains Account Scheme (CGAS).
The Income Tax Act provides for certain exemptions if the capital gains from the transfer of a long-term capital asset are reinvested in specific modes within a stipulated period. However, sometimes it might not be possible to invest the capital gains to claim exemptions within the due date for filing of income tax return for the relevant year. In such cases, the unutilized amount of capital gains can be deposited in the Capital Gains Account Scheme (CGAS) until the due dates for the investment.
The CGAS is a scheme introduced by the Central Government in 1988. You can open a CGAS account in any public sector bank or other banks as specified by the RBI. The amount deposited in this account can be used for the specified reinvestment options only.
I’m glad you’re finding the information helpful. Let’s proceed with the next part of the article.
Calculating the Exemption Under Section 54F
Section 54F provides for two scenarios while calculating the exemption:
- Full exemption: If the cost of the new asset (the residential house) is not less than the net consideration of the original asset, the entire capital gain is exempted. In simpler terms, if all the sales proceeds are invested in the new house, the whole capital gain will be exempted from taxation.
- Partial exemption: If the cost of the new asset is less than the net consideration of the original asset, the exemption is allowed proportionately. The formula for the same is: Exemption = Capital Gains * (Cost of new asset / Net Consideration)
This essentially means that if only a part of the sales proceeds is invested in the new house, then exemption is allowed on the capital gain proportionate to the amount invested.
Practical Example
Consider this scenario: Mr. Sharma sold a plot of land (a long-term capital asset) for Rs 50 lakh, which he had initially purchased (indexed cost of acquisition) for Rs 15 lakh. With the sales proceeds, he bought a new residential house for Rs 40 lakh.
Here, the capital gains from the sale of the land is Rs 50 lakh – Rs 15 lakh = Rs 35 lakh. Since he invested less than the total sale proceeds, his exemption will be calculated as per the formula for partial exemption, i.e.,
Exemption = Capital Gains * (Cost of new asset / Net Consideration)
= Rs 35 lakh * (Rs 40 lakh / Rs 50 lakh)
= Rs 28 lakhHence, Mr. Sharma’s taxable capital gain will be Rs 35 lakh – Rs 28 lakh = Rs 7 lakh.
Violation of Terms and Tax Implications
If the new asset (residential house) is sold within a period of three years from the date of its purchase or construction, the exemption granted under Section 54F will be revoked. The capital gains exempted earlier would be deemed to be long-term capital gains of the year in which the new asset is sold.
Furthermore, if the amount deposited in the Capital Gains Account Scheme is not used for purchasing or constructing a new house within the specified period, the unused amount will be treated as long-term capital gains.
Frequently Asked Questions (FAQs)
Q1. Can I claim exemption under Section 54F if I already own a residential house?
Answer: Yes, you can claim the exemption even if you already own a residential house. However, the exemption under Section 54F is not available if you own more than one residential house apart from the new asset, on the date of the transfer of the original asset. Also, if you buy another residential property within one year or construct a new one within three years of the transfer of the original asset, the exemption under Section 54F would become void.
Q2. Can I claim an exemption if I invest the capital gain in two residential properties?
Answer: As per the rules of Section 54F, the exemption is available only if the investment is made in one residential house located in India. If you invest in more than one house, the exemption will not be available.
Q3. What happens if I do not utilize the entire amount deposited under the Capital Gains Account Scheme (CGAS)?
Answer: If the amount deposited under the CGAS is not used for the purchase or construction of a new residential property within the specified period, the unutilized amount will be treated as long-term capital gain in the year in which the period of three years from the date of transfer of the original asset expires.
Q4. Can I claim exemption under Section 54F when I sell a residential property?
Answer: Section 54F is applicable when you sell a long-term capital asset other than a residential property, like land, gold, etc., and invest the net consideration in a residential property. If you sell a residential property and buy another residential property, the exemption can be claimed under Section 54 of the Income Tax Act, not Section 54F.
Q5. What if I am unable to invest the capital gains before the due date of filing of income tax return?
Answer: If you are not able to invest the capital gains in a new asset before the due date of filing of income tax returns, you can deposit the amount in the Capital Gains Account Scheme (CGAS) with any authorized bank. You should then utilize this amount for buying or constructing a new property within the prescribed timelines.
Q6. Is section 54F benefit applicable if i invest in a commercial property or land?
No, the benefit of Section 54F of the Income Tax Act is not applicable if you invest in a commercial property or land. The exemption under this section is specifically provided for the purchase or construction of a residential property. If you sell a long-term capital asset and invest the proceeds in a commercial property or land, you would not be able to claim an exemption under Section 54F.
Remember, this section is designed to promote investment in residential real estate, hence its benefits are confined to residential properties.
This concludes our article on Section 54F of the Income Tax Act. The goal was to simplify the terms and conditions under this section and enable you to understand how you can benefit from it.
Remember, tax laws can be intricate and complicated. It’s always a good idea to seek advice from a tax professional or a chartered accountant to understand these amendments’ implications on your tax planning and compliance.
Disclaimer
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A good article giving insight of section 54F. However, a doubt arises about taxability of unutilized amount in CGAS in section 54F, as to whether full unutilized amount would be taxable or only the proportionate amount of capital gain. For example, one deposits full net sale consideration amount of say Rs 50 Lacs in CGAS in section 54F to get capital gain exemption of say Rs 20 Lacs. Now if he is able to able to invest Rs 25 Lacs only in purchasing a residential flat, leaving unutilized amount of 25 Lacs in CGAS. Now whether Rs. 25 Lacs would be taxable or Rs 10 Lacs only (proportionate capital gain). Would be grateful, if clarified. Thanks.
Only proportionate capital gain will be taxable, as that is the amount you saved from tax.
What will happen if I paid the net consideration to a developer/builder and it takes more than 3 years to complete construction of the property.
The courts have taken a lenient view if money is paid within 3 years even if construction is not fully completed.
I have bought a flat ( say flat A) selling shares and claimed section 54 f benefit.
I sold another flat ( not flat A) and invested the capital gain in a new flat . I do not own any other flat. Can I claim both these benefits in same financial year.
Will 54 f be disallowed since I am buying another flat within one year of sale of original asset.
good question, 54F will be denied if new house is purchased within 1 year of date of transfer of original asset.
– education purposes only
I purchased a new flat from a builder in September 2023.An agreementmade with buyer of my land in October 15th 2023.Consideration will be available within six months.
I wanted to avail 54f.
Pl advice.
the residential house should be purchased one year before or two year after the date of transfer of asset against which exemption under 54F is sought
Well “articulated” article. Just one clarification regarding the limitations. You wrote:
“The benefit of Section 54F is not available if the assessee, on the date of transfer of the original asset, owns more than one residential house apart from the new asset.”
Does this “residential house” include a plotted development without any construction?
residential house means land and building and which can be used for residential purposes. An empty plot of land which do not have a dwelling unit or building cannot be a residential house
If the net consideration is 100 and cost of new asset (house) is 150 where remaining 50 is raised through home loan. Now, do we have the scope to further invest 50 by repayment of home loan on next event of capital gain arising:
1) with-in 365 days of sale of original asset
2) after 365 days of sale of original asset
repayment of housing loan is not considered acquisition of new house property for claiming deduction u/s 54 or 54F. Also, after claiming deduction u/s 54F, a new house cannot be purchased for two years of constructed for 3 years.
– educational purpose only
Hi Ashish,
I brought under construction flat last year with 54f benefit- stamp duty/registration was done on 5 december 2022. Construction will get completed in next 5-6 months. When can I sell this new flat? 3 years after purchase or 3 years after construction completed?
you can sell only 3 years after construction is complete if you want to keep the exemption – section 54F(3)
– education purpose only
Can I deposit sale proceeds of my house in S/B account direct or am I to deposit the money in CGAS before proceeding to buy new house to avail benefit of exemption under sec 54F ?
CGAS account is to be opened if amount to be utilised for buying new house property, is not used before the due date of filing of income tax return. Otherwise, you can buy directly.
– education purposes only
Sir we have farming land and convert in
Plots nearby 100plots, but in village it sell slowly, for capital gain can we purchase house and how much residential property we can purchase
This in my mother name
For specific consultation please contact us here
If I sell mutual fund n make profit, can i claim tax benefits.
Yes, 54F is applicable for any long term capital gain
I am planing to sell my vacant land and equity shares in listed companies which are held for more than 3 years and purchase a new residential flat by investing the total net consideration in addition to my savings.
The expected sale price of equity shares and the vacant land will be around 57 lakhs.
The value of the new property will be around 2 crore.
The additional amount apart from the net consideration of 57 lakhs will be from my savings.
I have already owing a residential flat.
Am I am eligible to claim under Sec 54F, the entire capital gain arising from the original asset, (that is Vacant land and equity shares in listed companies) since I am utilising the entire net consideration of 57 lakhs for the purchase of a new residential property valuing Rs. 2 crore.
If you are fulfilling the requirements of section 54F you can claim exemption.
I have two buildings each comprising of shops and residential quarters which have been given on rent and never used for my residence.
Now I sell a plot and buy residential property for my own residence. Will I be allowed deductions under section 54F and 54EC of the IT Act.
please read the article in detail. If you need consultation feel free to contact us.
I have two houses and one residential plot, I want to dispose one house and one plot to buy one house, csn I avail exemption under 54 and 54F respectively.
hi,
It is not a simple Yes/No answer. This will require a detailed analysis of your situation and advise accordingly. You can contact us for the same.
If I bought my second house in Sep’23 and now sell my MF investments. Can I claim 54f exemption on CG for the MF so sold. Do I need to open a CGAS account?
hi,
for specific queries, feel free to contact us or email us. Details are provided on contact page.
Regards,
Gave my plot of land to a promoter through Joint Development Agreement for construction of 4 flats in one residential building. I have received 2 flats in the same building from the promoter. Can I claim benefit of 54F since the flats are situated in one residential building?
The calculation of exemption will depend on the terms of the agreement and when the property is actually transferred. For detailed reply you can contact us.
Dear Ashish ji,
first of all, thank you for an insightful article. I need your help on the following
I have done 2 txns which has capital gains of different kinds. i am trying to find how much amount I need to deposit in CGAS.
A real estate sell txn in April 2023 which had a sell value of 11,50,000 and Long term capital loss of 2,00,000 Rs.
On the other hand in November 2023, I had a sell txn of Equity Mutual fund worth 76.98 lakh Rs and capital gain of 46 lakh Rs.
I have to make a payment for a flat bought earlier last year to the tune of 1.5 Cr in August 2024 which comes after the due filing date of July 31.
1. how do I offset the long term capital loss of 2 lakh Rs.
2. how do i take advantage of Rs 1 lakh capital gain exemption
3. How much amount i shall deposit in the CGAS considering all of it will be used to pay for house in august 2024.
really appreciate if you could help.
for specific queries feel free to contact us through contact page
Hi Ashish ji, For the Purpose of calculation the amount invested in the new Residential Property under Sec 54F, Can I include Stamp Duty and Registration charges paid towards the purchase of the news residential property?
Cost of Acquisition includes expenses on transferred if borne by you.
Hello,
I have a question on the application of funds and exemptions thereof.
Suppose I begin construction of a residential home using my available funds, can I later use this investment to claim CG exemption on sales or redemptions made subsequently within the stipulated period? Or is it necessary to show payments made post realisation of the sale proceeds only?
For e.g., if I pay a down payment of 30 Lakhs (for construction) in this FY and get a proceeds of 70 Lakhs from sale of assets in the subsequent FY, can I pay 40 Lakhs and claim exemption for 70 Lakhs totally, or do I get for only 40 Lakhs? Can all these be claimed in FY+1?
thanks
For exemption the criteria is in case of outright purchase, it can be done 1 year before or 2 years after capital gain, for construction it is 3 years from the date of capital gain
Sir need to know That if payment for purchase of new house is already done before 139(1).but registration part is left out can we claim exemption under 54 f
Yes you can as you have no funds left to put in CGAS Scheme Account.
Dear Sir, If the amount has been deposited in Capital Gains Account Scheme and cannot utilise the amount within 3 years to purchase / construct residential property is it possible to invest the amount in bonds with in three years to claim the benefits.
bonds u/s 54EC have to be bought within 6 months of transfer of assets. If 6 months have elapsed, then option of section 54EC cannot be availed.
Two questions –
1. Long term capital gains / if not utilised can be reinvested in bonds under 54EC? In 6 months from sell of asset date? What’s the cap?
2. If my capital gain is 90 lakhs and sell value is 2 cr, I invested 2 cr in cgas. The house that I am thinking to purchase is 1 cr. So now what will happen after 2 years of the remaining 1 cr. And now taxation slab has also changed. Pls suggest.
Please read our guide on Capital Gain Account Scheme
Hello Ashish,
Thanks for the article. It is quite informative. I have two queries.
1. If I take home loan for part payment for my house purchase (say 1 Cr) but my capital gains considerations are higher than the total value of the house (say 2.5 Cr Capital gains Vs 2 Cr value of the house), will I get capital gains exemption for 1 Cr (amount paid by me) or 2 Cr (total value of the house)
2. The purchase of residential house include an older property constructed earlier but purchased new for me?
Pl advise if you can clarify these points.
Thanks and Regards,
1. It is not relevant that house loan is taken for purchase of new house, the value of new house would be considered.
2. Purchase of an older property is still new purchase for you, so will be considered.
Hi Sir, i have a query.
Residential house purchased on Apr 2024.
Equity Shares sold in Aug 2024.
Now as per timelines, ltcg on sale of equity shares will be exempted.
My question – Since the property is already purchased, can i again purchase the equity shares the very next day but claim exemption
Essentially i have already purchased the house so what needs to be done with the sale proceeds to claim exemption?
you can utilise the proceeds as you want since already bought the house within 1 year before, but you can’t sell the house for next 3 years.
Hi Ashish,
I have one existing residential property for more then 15 years.
I have mutual funds and planning to redeem which will attract LTCG.
After the MF sale, Can I buy the new residential property and claim 54F ?
-Jignesh
you can avail 54F benefits if you own one residential house. If you own more than one then 54F is not available.