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Section 54F: Capital Gains Can be Invested Multiple Times to Buy a New Residential House Property

Updated on: 09 May, 2024 11:04 AM

Tax planning has become a crucial aspect of taxpayers' financial journey these days. With an increase in the overall income, people are finding more and more ways to save taxes by investing in various schemes. The Indian Income Tax Act contains multiple provisions that allow taxpayers to claim an exemption across various sections. Section 54F is one such section of the Income Tax Act that allows tax exemption on the sale proceeds from capital assets except house property if such gains are reinvested for the construction or purchase of house property.

Recent Update: The Income Tax Appellate Tribunal (ITAT), Delhi, has allowed multiple-year exemption u/s54F for a house under construction. In other words, the taxpayers can now invest the capital gains for the second or third time also towards the new house property.

Case Study

If an individual sells multiple properties to buy a new residential house, then is there an exemption available for capital gains on the sale of all such properties? Will this exemption be allowed on the sale of all properties against the purchase of the same new residential property?

A taxpayer sold his commercial property and invested the amount received in constructing a house. He claimed a deduction u/s 54F in 2008-09 against the investment made in constructing a farmhouse.

In 2010-11, the taxpayer sold his 5 properties and invested the proceeds in constructing the same house. He claimed a deduction of Rs.1.59 crores u/s 54F in 2010-11 against the investment in the same house.

As per the rules of section 54F, the exemption cannot be granted where the taxpayer has more than one residential house other than the new house on the date of transfer of the original asset.

The ITAT allowed the exemption under section 54F to the taxpayer as he fulfilled all the conditions for claiming the exemption under section 54F.

Have more questions regarding capital gain taxation? Reach out to our tax experts to guide you through the complexities of capital gain tax and help you claim maximum deductions. Book Online CA Now!

What is Section 54F of the Income Tax Act?

Section 54F of the Income Tax Act allows individuals to claim an exemption on long-term capital gains earned from selling long-term capital assets like jewelry, shares, and other capital assets except for house property if such sale proceeds are reinvested for the purpose of purchasing or constructing a house.

The proceeds from the sale of capital assets like gold, jewelry, and other capital assets are subject to tax in the hands of the taxpayer. However, if such sale proceeds are reinvested for the purchase or construction of a house property, then such gains can be claimed as an exemption under section 54F. However, there are certain conditions that must be fulfilled in order to claim this exemption.

Who can Claim Exemption Under Section 54F?

Section 54F of the Income Tax Act provides an opportunity for individuals and Hindu Undivided Families (HUF) to avail of exemption on capital gains by investing in a residential house.

Key conditions to qualify for exemptions under Section 54F include:

  • Applicable to both individuals and HUFs.
  • The capital gain results from the transfer of long-term capital assets other than a residential house.
  • The taxpayer should not own more than one house.
  • The residential house must be purchased within one year before the sale or two years after the sale of the capital asset. If constructing a house, completion must occur within three years from the sale. Otherwise, the exemption can be withdrawn.
  • The residential house cannot be sold within three years of purchase, or else the exemption will be revoked.
  • If any other house is purchased within one year from the sale of the capital asset or the construction of another house is completed within three years, the exemption will be withdrawn.
  • If the taxpayer fails to utilize the sale proceeds for buying or constructing the house before the due date for e filing Income Tax Return (ITR), the proceeds must be deposited in a 'Capital Gains Account' with a bank.

What is Capital Gain Account Scheme (CGAS)?

A Capital Gain Account Scheme, or CGAS, is a governmental scheme that allows taxpayers to park their capital gains in the CGAS account and secure their exemption under sections 54 and 54F if they are not able to reinvest the capital gain proceeds immediately.

Here’s an example: Mr. Ravi had capital gains of Rs.10 lakhs from the sale of property on 23rd March 2023. However, the date of the ITR filing was close, and he couldn't reinvest this amount in a new property in such a short time. So, he kept the capital gains in a CGAS account, which enabled him to claim the exemption under sections 54 and 54F.

Note: The taxpayer must reinvest the funds parked in the CGAS account within 2 years; otherwise, the exemption can be revoked.

How Much Capital Gain Exemption is Available Under Section 54F?

Let's consider an example to illustrate the application of capital gains exemptions according to Section 54F.

For instance,
An investor sells capital assets valued at approximately Rs 50 lakh, resulting in capital gains of Rs 10 lakh. The investor decides to reinvest this amount towards the purchase or construction of a residential house.

Now, two scenarios can unfold:

Scenario 1: Reinvestment of the entire amount
If the investor reinvests the entire proceeds from the asset sale into the purchase or construction of a residential house, they can claim the full long-term capital gain exemption of Rs. 10 lakh.

Scenario 2: Partial reinvestment of sale proceeds
In cases where only a portion of the sale proceeds is reinvested in the construction or purchase of the residential property, only a proportionate amount of the long-term capital gains is exempted under Section 54F. The following formula can be used to determine the exempted amount:

Exemption under Section 54F
= (Amount Re-Invested / Net Consideration) * Long-Term Capital Gain
Using the aforementioned example,
Assuming the investor reinvests Rs. 40 lakhs,
The capital gains exemption would be: (40 lakh/50 lakh) * 10 lakhs
Resulting in a capital gains exemption of Rs. 8 lakhs

What are the Exceptions to the Capital Gain Exemption Under Section 54F?

Exemption under Section 54F of the Income Tax Act, 1961 for long-term capital gains is not applicable if:

  • The taxpayer possesses more than one residential property at the time of transferring the actual asset. However, the residential property purchased using the long-term capital gains to avail exemption under Section 54F is exempted from this provision.
  • The taxpayer constructs an additional residential property within three years from the transfer date of the original asset. However, the newly constructed property intended for claiming exemption under Section 54F is exempted from this provision.
  • The purchase of the new property should be made before 1 year before the sale or 2 years after the sale of the property.
  • The taxpayer acquires an additional house within one year from the transfer date of the original asset. Similarly, the new property purchased to claim exemption under Section 54F is also exempted from this provision.

How is Section 54 Different from Section 54F?

Given below are the points of difference between section 54 and section 54F -

Basis Section 54 Section 54F
Type of asset eligible for exemption Sale of residential property Sale of assets other than residential property
Maximum deduction allowed Up to Rs. 10 crores (as per Union Budget 2023) Up to Rs. 10 crores (as per Union Budget 2023)
Reinvestment requirement Entire capital gains must be reinvested Entire sale proceeds must be reinvested
Treatment of uninvested amount The remaining amount taxed as long-term capital gains Proportionate exemption allowed
Ownership of residential properties Not mandatory Not allowed to own more than one residential house at the time of sale of an old asset
Number of properties eligible for exemption One-time exemption for investment in two properties if capital gains ≤ Rs. 2 crores No such exemption available

What are the consequences if conditions are not fulfilled after claiming the exemption Under Section 54F?

There are two scenarios in which you wouldn’t be fulfilling the conditions after claiming the exemptions under Section 54F of the Income Tax Act.

  • Not reinvesting the capital gains: If you don't use the sale proceeds to buy a new residential house within a specific timeframe (one year for purchase, three years for construction), the exemption you claimed under Section 54F gets withdrawn. The capital gains you earlier exempted will be considered long-term capital gains of the year in which the deadline to invest passed. This means you'll have to pay tax on those gains.
  • Buying another property too soon: Section 54F also restricts you from purchasing another residential property within two years from the sale of the old one (or constructing one within three years). If you do buy another property within this period, the exemption under Section 54F is revoked again. The previously exempted capital gains are treated as long-term capital gains of the year you bought the new property.

Now that you are aware of the exemption under section 54F, make sure you don’t miss out on claiming it. If you find taxes complicated, you can also consider getting help from our team of expert chartered accountants, who are always ready to help you with your taxes. Don’t wait for the last date to file ITR. Hire an Online Chartered Accountant Now!

Frequently Asked Questions

Q- What is the investment limit for Section 54F?

The Income Tax Act sets the exemption limit under Section 54F to Rs. 10 crores, as announced in the Union Budget 2023 on April 1, 2023. Earlier, there was no maximum limit on the exemption available under section 54F.

Q- Can I claim a capital gains exemption under section 54EC on the sale of multiple properties?

You must not possess more than one residential house when selling the original asset. If you sell this newly acquired property within three years of purchase, the exemption will be revoked, and any capital gains from its sale will be subject to short-term capital gains tax. Get eCA help to plan your capital gain taxes.

Q- Is capital gains exempt from 54F?

Section 54F of the Income Tax Act, 1961, permits tax exemption on long-term capital gains generated from the sale of a capital asset excluding a residential property. Thus, if you sell assets such as shares, bonds, jewelry, or gold, this provision applies.

Q- What is the reinvestment period for capital gains?

Individuals must reinvest the proceeds into specified assets within six months from the day the asset was sold. The capital gains should not exceed the investment amount. If only a portion of the gains is reinvested, the exemption under capital gains applies only to the reinvested amount.

Q- Can I claim 54EC and 54F claimed together?

Yes, you can claim both exemptions under Section 54EC for land or building and under Section 54F if it's not a residential house. To qualify, you must meet the conditions specified in each section.

Q- What is the difference between 54F and 54EC?

The Income Tax Act imposes taxes on long-term capital gains (LTCG). Nevertheless, Sections 54, 54F, and 54EC offer avenues for obtaining a tax exemption. Sections 54 and 54F involve utilizing capital gains for purchasing a home, while Section 54EC permits the purchase of specified government bonds, enabling exemption from LTCG tax.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.