Section 54F: Exemption on Capital Gains.

As per Section 54F of the Income Tax Act, you can claim tax deductions on Long-term Capital Gains (LTCG) earned by selling an asset. However, the condition prevails that these gains must not be made by selling a residential property.

You must reinvest the net consideration to purchase or construct a house property. The Income Tax Act classifies the capital asset you sold as an ‘original asset’ and the house property you buy as a ‘new asset’.

Eligible Deduction Amount u/s 54F

Here are some details of the exemption you can claim under this section:

You can claim this deduction if you reinvest the net sales consideration to purchase or construct a residential property
LTCG will be exempt from taxation if the net consideration from the original asset’s sale is less than the new asset’s cost
LTCG will only be exempt on a proportional basis if the net consideration of the original asset exceeds the new asset’s cost

The Finance Bill 2023 notified that the cost of the new asset will be taken as ₹10 Crores if its value exceeds this amount. Hence, this amendment has limited the maximum amount of Section 54F exemption to ₹10 Crores.

Who Can Claim Exemption Under Section 54F

To claim these deductions, you need to fulfil the following eligibility requirements:

You must pay taxes as an individual or Hindu Undivided Family (HUF)
It applies to long-term capital gains, i.e., the proceeds you get for holding an asset for more than 12 months (24 months in the case of landed property)
Capital assets can include gold, non-residential property, equity shares, and bonds

Under Section 54, taxpayers can invest in up to two house properties to get an exemption from long-term capital gains on the sale. However, the capital gain should not exceed ₹2 Crores.

How to Claim Exemptions Under Section 54F

The proceeds received from selling the eligible capital assets must be used in any of the below-mentioned ways to enjoy this exemption:

Purchase a new residential property within one year before the sale
Purchase a new residential property within two years after the sale
Construct a new residential property within three years after the sale

How to Calculate Exemption Under Section 54F

The amount of deduction that you can claim under this section depends on how much capital gains you reinvest. Here is an example to help you understand the Section 54F exemption calculation:

Number of shares owned by you	10,000
Shares’ purchase price	₹60
Cost of purchasing the shares	₹6,00,000
Selling price of the shares	₹100
Amount received by selling the shares	100*10,000 = ₹10,00,000
Capital gains earned	₹10,00,000 – ₹6,00,000 = ₹4,00,000

Here, the amount received from the sale of shares is ₹ 10 Lakhs. If you reinvest it to purchase or construct a residential property, the capital gains of ₹4 Lakhs earned will be tax-free under Section 54F.

When Section 54F Exemption is Not Applicable

The deduction under the aforementioned section of the Income Tax Act is not applicable under the following circumstances:

If you transfer your capital assets without holding them for a period of over 12 months
If you own more than one house property, other than the new asset, on the date of the capital asset’s transfer
If you buy another residential property within one year of the date of the transfer of the original asset
If you construct another house property within 3 years of the date of your capital asset’s transfer

Section 54 vs Section 54F

While exemptions on Section 54 and Section 54F are applicable to the transfer of a capital asset, there are certain differences between the two. These include:

Parameter	Section 54	Section 54F
Applicability	Sale of residential property	Sale of any asset (except residential)
Exemption Purpose	Reinvestment in another residential property	Reinvestment in a residential property
Holding Period for LTCG	As per the Act, a landed property qualifies as long-term capital if you hold it for 24 months or more	Classified as long-term capital if you hold them for more than 12 months

If I purchase a house property after selling the house in six months, will section 54F of the I-T Act, 1961, be applicable?

No. You cannot claim these deductions if you buy a new residential property, other than the new asset, within one year from the date of transfer.

Can I claim the benefits of Sections 54 and 54F of the I-T Act, 1961, simultaneously?

No. While you can claim an exemption on the transfer of house property under the former, the latter allows you to enjoy benefits on non-residential assets.

Can Non-residents of India (NRIs) claim the benefits under Section 54F?

Yes. NRIs can claim 54F capital gains tax exemption if they meet all the eligibility criteria and conditions to claim the exemptions.

Can I claim the entire exemption if I fail to reinvest the total capital gains?

No, you cannot claim the entire exemption if you do not reinvest the total capital gains.

What are the benefits of a capital gain deposit account scheme?

Under this scheme, you can transfer the unutilised sale proceeds into an account of an authorised bank. You can use the deposited sum partially or completely to purchase or construct a residential property.

What is the impact of transferring the net asset?

Selling the residential property within 3 years from the mentioned date will make the capital gains claimed u/s 54F taxable in the sale/transfer year.

What is the Section 54F exemption limit?

Under Section 54F, the exemption limit has been fixed at up to ₹10 Crores as per the Union Budget 2023 announcement.

How is the 54F exemption calculated?

The exemption depends on the amount invested in a residential property from the capital gains earned from the sale of another residential property. The entire capital gain amount must be reinvested to avail of the exemption.

Can I claim a 54F exemption for two houses?

No, you cannot claim tax benefits under this Section for two houses.

What is the meaning of net consideration?

Net consideration is the total value received from the transfer of capital assets, excluding the expenses exclusively incurred in connection with that transfer. Hence, we can say that,

Net Consideration = Full Value of Consideration - Expenditure