Section 54F of the Income Tax Act

The investments you make into assets like homes, cars, stocks, bonds, art collections, etc., are known as capital assets, which are defined u/s 2(14) of the IT Act, 1961. The capital assets as per the period of ownership are divided into two categories - Short Term Capital Assets and Long-Term Capital Assets. The gain that arises from the transfer/selling of these capital assets after holding them for a long period of time is considered a Long-Term Capital Gain (LTCG).

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This LTCG is taxable by the Income Tax Department, but the IT Act of 1961 also allows few capital gains tax exemption benefits.

There are many long-term capital gains exemptions available in the Income Tax Act of 1961, including Section 54, Section 54F, Section 54EC, and Section 54B.

What is Section 54F of the Income Tax Act?

The sale or transfer of capital assets (gold, jewellery, shares, etc.) attracts capital gains taxable in the taxpayer's hands. Under Section 54F of the Income Tax Act, 1961, tax exemption is allowed on the long-term capital gains earned from selling any capital asset other than a house property.

Consider an example from the table below: 

Assets Sale/ Purchase Amount
No. of shares you bought 15,000
Per share purchase price Rs. 50 per share
Total cost of purchasing the shares Rs. 7.5 lakhs
Selling price of the shares (after keeping them invested for 5 years) Rs. 100 per share
Total amount received on the sale of 15,000 shares Rs. 15 lakhs
Long Term Capital Gains (LTCG) earned = Rs. 15 lakhs- Rs. 7.5 lakhs

=Rs 7.5 lakhs

  • Thus, the capital gains are the proceeds you earn by selling your capital assets like shares, gold, jewellery, bonds, etc., and reinvesting the sale proceeds for purchasing or constructing a house property. These returns earned (which are later reinvested) on the sale of the capital asset are allowed as an exemption from income tax under Sec 54F. However, certain prescribed conditions need to be satisfied to claim this tax benefit.

  • On the contrary, if the sale proceeds are reinvested in any other asset, the gains would become taxable, and you could not have taken the benefit of Section 54F.

Long Term Capital Gains Exemption Limit as per Union Budget 2023: 

From 1st April 2023, the maximum deduction available under Section 54F is up to Rs. 10 crores. Earlier, there was no cap on the tax exemption made u/ Sec 54F.

Understanding 'Net Consideration'

As per Sec 54F of the Income Tax Act, the assessee has to reinvest the 'net consideration' to avail of capital gains exemption. The 'Net Consideration' of capital asset transfer means the full value of the consideration received for transferring the capital assets as reduced by some expenditure incurred completely and exclusively by connecting with such transfers. In this way,

Net Consideration = Full Value of Consideration (-) Expenditure

Net consideration arises for transferring long-term capital assets that are invested in the following:

  • The net consideration is reinvested in the buying of one residential property one year before the transfer date or within two years after the transfer date.

  • The net consideration is reinvested in constructing 1 residential property in India in three years from the transfer date.

Conditions to Fulfil for Availing Exemption u/Sec 54F

As per Section 54F of the Income Tax Act, capital gains exemption is made available in the situation of long-term capital assets transfer against the investment one makes in a residential house. 

Some of the features to avail exemptions u/ Sec 54F of the Income Tax Act are mentioned below:

  • The exemptions u/ Section 54F are for Hindu Undivided Families (HUF) and individuals.

  • The capital gain arises from transferring any long-term capital assets other than the residential house.

  • The assessee must not own more than one house

  • The house must be purchased within one year before or two years after the date at which such capital asset is sold. 

  • If the house is being constructed, the construction must be completed within 3 years from the sale of such a capital asset.

  • The house must not be sold within 3 years; else, the exemption will be withdrawn.

  • The exemption u/ Sec 54F would be withdrawn if any other house is purchased (other than the one purchased) within one year from the date of selling a capital asset or the construction of another house is made within three years.

  • If the assessee is unable to utilize the sale proceeds for buying or constructing the house before the due for filing the Income Tax Return (ITR) in which such capital asset is sold, the procedure must be transferred to a 'Capital Gains Account' with a bank.

The Portion of Capital Gain Exempted under Section 54F

Let us take an example to understand the extent of capital gains exemptions under Section 54F. 

For Example,

 An investor sold capital assets worth about Rs 50 lakh. The capital gains that arise from this sale are Rs 10 lakh. The investor re-invests this sale to proceed with the purchase/construction of the residential house.

Now, there can be two scenarios:

Scenario 1:  When the entire amount is reinvested

When the investor reinvests the entire amount from the sale of assets in order to purchase or construct a residential house, he can claim the long term capital gain exemption limit on the total capital gains of Rs. 10 lakh.

Scenario 2: When a part of sale proceeds is reinvested

In the situation when only a part of the net consideration is in investing in the construction or purchase of the residential property, then only the long-term capital gain's proportionate amount is exempted u/ Section 54F. The following formula can be used to calculate the proportionate amount:

Exemption under Section 54F
= (Amount Re-Invested / Net Consideration) * Long Term Capital Gain
Using the Above Example,
Investor reinvests= Rs. 40 lakhs
Capital gains exemption= (40 lakh/50 lakh)* 10 lakhs
                                           = Rs. 8 lakhs

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Circumstances in Which Exemptions u/s 54F are Not Available

The exemption u/ Sec 54F of Income Tax Act, 1961 on long-term capital gains is not provided if:

  • The taxpayer has more than one residential property on the date of transfer of the actual asset. However, the house bought using the long term capital gains to claim the exemption u/s 54F is exempted from this act.

  • The taxpayer constructs an additional residential property within three years from the transfer date of the original asset. The constructed new asset to claim the exemption u/s 54F is exempted from this act.

  • The taxpayer buys an additional house within one year from the transfer date of the original asset. This new asset bought to claim exemption u/s 54F is also exempted from this act.

Withdrawal of Exemption under Section 54F in Case of Net Asset Transfer

Situation: The newly purchased constructed residential property or residential property is transferred before the expiration of 3 years period of its construction or purchase.

Consequences u/Sec 54F: The capital gain exemption provided u/ Section 54F will be taxable under the long term capital gain of the last year wherein the new asset is being transferred.

Account Scheme for Deposit of Capital Gain

  • Case 1: When talking about net consideration, if it is not reinvested within the last date of return filing of income u/ Section 139.

    Action: Then, the amount must be deposited in the scheme for the capital gain deposit account. The amount deposited in the capital deposit scheme account must be used to purchase or construct the residential property within a specific period.

  • Case 2: If the deposited amount in the capital gain scheme of the deposit account is not utilized partially or completely within a specific period for construction or purchase.

    Action: In such a situation, on the period's expiry, the utilized amount is treated as a capital gain.

Difference between Section 54F and Section 54F of the Income Tax Act

Section 54 Section 54F
Long-term capital gains exemption available for the sale of a residential property Long term capital gains exemption for the sale of any asset other than a residential property
As per the Union Budget 2023, a maximum of Rs. 10 crores can be claimed for deductions under Section 54. In Section 54F, as per the latest Union Budget of 2023, the maximum tax exemptions are capped at up to Rs. 10 crores.
Entire capital gains have to be invested in claiming full exemption Entire sale proceeds have to be invested in claiming full exemption.
If the entire capital gains are not invested, the remaining amount is taxed as long-term capital gains If entire net sale proceeds are not invested, the proportionate exemption is allowed u/ Sec 54F
Ownership of one or more residential properties is not mandatory Ownership of more than one residential house at the time of sale of an old asset is not allowed
This once-in-a-lifetime exemption is available for investment in 2 properties if the capital gains do not exceed Rs. 2 crores No such exemption is available under Section 54F

Wrapping It Up!

We invest in different capital assets to build our legacy property during our lifetime. Therefore, the knowledge of Section 54F of the Income Tax Act is crucial in claiming long term capital gains exemption and saving hard-earned money for any important occasion.

FAQ's

  • What is the Section 54F exemption limit?

    The exemption limit u/ Sec 54F of the Income Tax Act is fixed up to Rs. 10 crores as per the announcements made in Union Budget 2023 on 1st April 2023.
  • How many times Section 54F can be used?

    Section 54F of the income tax act can claim more than once if the capital gains exemption claim is made on purchasing the same house property. The maximum amount of tax deduction allowed is up to Rs. 10 crores.
  • Can we claim both Sec 54F and Sec 54EC?

    No, Section 54F and Section 54EC are mutually exclusive tax exemption sections. They both can't be claimed together under the Income Tax Act, as benefits u/ Section 54EC are made when the capital gains are made from a residential property, while to claim 
  • What is Section 54F withdrawal?

    As per Section 54F of the Income Tax Act, the long term capital gains exemption provided will get withdrawn if an individual buys another house (other than the one on which he claimed exemption) within 1 year from the date of selling his capital assets or if he constructs another house within 3 years of the sale of the capital assets.

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