Section 54F of Income Tax

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Section 54F

The capital assets’ definition is given u/s 2(14) of the IT Act, 1961. The capital assets as per ownership's period are divided into two categories - Short Term Capital Assets and Long Term Capital Assets. The gain that arises from the transfer of long term capital assets is considered as ‘long term capital gain’ and in the same way the gain that arises through the transfer of the short term capital assets is considered as ‘short term capital gain’. There are many exemptions available in the IT Act against the gains of long term and exemptions are included in Section 54, Section 54F, Section 54EC, and Section 54B.

What is Section 54F?

As per the Income Tax Act's Section 54F, exemption of capital gain 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/s 54F are mentioned below:

  • The exemptions u/s 54F is for Hindu Undivided Families and individuals.
  • The capital gain that arises for transferring any long term capital assets that is other than the residential house.
  • Net consideration that arises for transferring long term capital assets that are invested in the following:
    • The net consideration is re-invested in the buying of one residential property in one year before the transfer date or within two years after the transfer date.
    • The net consideration is re-invested in constructing 1 residential property in India in three years from the transfer date.

‘Net Consideration’ Meaning

The ‘Net Consideration’ of capital asset transfer means full value’s consideration received for transferring the capital assets as reduced by some expenditure that incurred completely and exclusively by connecting with such transfers. In this way,

Net Consideration = Expenditure (-) Full Value of Consideration

Circumstances in Which Exemptions U/S 54F is Not Available

The circumstances in which the exemption is not applied u/s 54F of the IT Act, 1961 are:

  • The taxpayer has more than one residential property on the date of transfer of the actual asset. However, the house that is brought to claim the exemption u/s 54F is exempted from this.
  • 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.
  • 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.

Deduction Amount - Net Consideration’s Full Amount is invested

In the situation of investment of the full amount of the net consideration in construction/ purchase of a residential house, then the complete amount of long term capital gain can be exempted u/s 54F.

When part of the Net Consideration Amount is invested: 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 long term capital gain's proportionate amount is exempted u/s 54F. The following formula can be used to calculate the proportionate amount:

Exemption under Section 54F = Net Consideration / Amount Re-Invested * Long Term Capital Gain

Consequences of Net Asset Transfer

In the situation of transfer of newly purchased constructed residential property or residential property before expiration of 3 years period of its construction or purchase, as per the case at that time, then the capital gain that is exempted u/s 54F will be taxable under long term capital gain of the last year wherein the new asset is being transferred.

Account Scheme for Deposit of Capital Gain

When talking about net consideration, it is not re-invested within the last date of return filing of income u/s 139, and then the amount must be deposited in the scheme for the capital gain deposit account. The amount that is deposited in the account of the capital deposit scheme must be used to purchase or construction of the residential property within a specific period.

If the deposited amount in the capital gain scheme of deposit account is not utilized partially or completely within a specific period for construction or purchase, as the case can be, then in such situation on period's expiry, the utilized amount is treated as a capital gain.