Under Section 2(14), ‘capital assets’ are divided into 2 categories, namely, long-term capital assets and short-term capital assets. The profit gained from the transfer of either asset type is known as short-term capital gain and long-term capital gain.
As per Section 54F, the long-term capital gains earned by selling a capital asset, except a house property, can be exempted from tax subject to the given condition. The capital assets comprise bonds, gold, shares, and other such items.
The condition prevails that the gains from the sale must be reinvested in either the purchase or the construction of a house property. If you meet this condition, the gains earned from the sale of the capital asset will be tax-free u/s 54F.
‘Net consideration’ for transferring a capital asset is the total value received from the transfer, minus any expenses exclusively incurred in connection with that transfer. Hence, we can say that,
Net Consideration = Expenditure - Full Value of Consideration
Under Section 54, tax exemption is allowed on the long-term capital gains that are earned by selling the capital assets. However, this particular section is divided into Sections 54 and 54F. The major difference between the two sections is the kind of capital asset that has been sold.
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 |
There are certain common requirements for the applicability of sections 54 and 54F. They are as follows:
New residential property must have been constructed or purchased
New residential property must be purchased within one year before or two years after selling the asset/property
New residential property must have been constructed within three years of its sale
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.
To claim the tax exemption offered u/s 54F, you must be an individual or a Hindu Undivided Family (HUF). The proceeds received from selling the eligible capital assets must be used in any of the below-mentioned ways:
To purchase a new residential property within one year prior to the sale
To purchase a new residential property within two years after the sale
To construct a new residential property within three years after the sale
Exemptions under Section 54F are not applicable under the following circumstances:
New residential property is sold within 3 years
Another residential property, other than the one re-invested in, is purchased within one year from a capital asset sale
Another house was constructed within 3 years
Let’s take a look at the following example to help you understand calculation under Section 54F:
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 |
Now, the amount received from the sale of shares, in this case, ₹ 10,00,000, is re-invested in the purchase or construction of a residential property. Here, under Section 54F, the capital gains of ₹ 4,00,000 earned will be tax-free.
However, if ₹ 10,00,000 is used to invest in any other asset, except a residential property, the capital gains will be subject to tax.
Under Section 54F, investing the entire sale proceeds allows the taxpayer to claim the full amount as an exemption. However, if only a part is invested, the exemption is reduced proportionately.
Suppose that an investor sells assets worth ₹60,00,000, which includes the capital gains worth ₹10,00,000. The person then re-invests this sum for the construction or the purchase of a residential property. In this case, the exempted capital gains are calculated as mentioned below:
Scenario 1: When the entire amount of capital gains has been re-invested
The tax on the total capital gains, i.e. ₹10,00,000, can be exempted.
Scenario 2: When only a portion of the capital gains has been re-invested
The computation of the exemption on the capital gains will be done on the portion of the re-invested amount. For example, if the investor has re-invested ₹4,00,000, the exemption amount on the capital gains will be computed as,
(4,00,000/6,00,000)*10,00,000 = ₹6,66,666
Section 54F is a valuable provision enabling taxpayers to save on taxes through strategic investments in residential properties. By delving into its eligibility criteria and requirements, individuals can plan their investments strategically to utilise the benefits of this tax-saving tool.
FAQs on Section 54F of the Income Tax Act, 1961
If I purchase a house property after selling the house in six months, will section 54F of IT Act, 1961 be applicable?
No. Section 54F is applicable only with regard to the capital gains earned from the sale of a capital asset apart from a house property.
Can I claim the benefits of sections 54 and 54F of the IT Act, 1961, both?
No. The benefits of Section 54 can only be claimed if you sell a house property, which is not the case with Section 54F. The latter is not applicable to sales of residential properties.
Can Non-residents of India (NRIs) claim the benefits under Section 54F?
Yes. Non-resident Indians can claim benefits u/s 54f if they meet all the eligibility criteria and conditions to claim the exemptions.
Can I claim the entire exemption if I fail to re-invest the total capital gains?
No, you cannot claim the entire exemption if you fail to re-invest the total capital gains.
What are the benefits of a capital gain deposit account scheme?
The Capital Gain Deposit Scheme, 1988, allows you to transfer the sale proceeds into an account of an PSU bank. Then, the amount can be partially or completely used 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 the exemption.
Suppose an investor reinvests ₹3,00,000 out of ₹6,00,000. To calculate the exemption on capital gains, use the formula:
(3,00,000/3,00,000)*6,00,000= ₹6,00,000
How much capital gain is tax-free?
Under Section 54F of the Income Tax Act, 1961, the capital gain invested in a residential property is eligible for exemption. The entire capital gain amount is tax-free if it is reinvested in the specified property within the stipulated time frame, subject to conditions.
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