Section 54F of Income Tax Act is a major relief section for the residents who wish to purchase house property by allowing for exemption of the amount invested in the house property by sale of long term capital assets except house property. However, there are certain limitations and conditions to be fulfilled for availing exemption under section 54F of Income Tax Act which are elaborated hereunder.
Section 54F of Income Tax Act – Applicability
Section 54F of Income Tax Act is an exemption that is available on transfer of any long term capital asset except house property for purchase of a residential house property. Section 54F of Income Tax Act is developed on the same lines as of Section 54 with some modifications. A long term capital asset means an asset that has been held by the assessee for more than 24 months before it was transferred.
Moreover, this exemption is available only to resident individuals or HUFs.
In the case of CIT v. Podar Cement Pvt. Ltd. (1997), the Supreme Court held that “ownership” for the purpose of Section 54F includes possession under a housing scheme and doesn’t strictly require a registered deed.
Capital Assets covered u/s 54F
The section states that the capital asset other than house properties will be covered for exemption. Thus, the capital assets would include:-
- Shares
- Debentures
- Bonds
- Mutual Funds
- Jewellery
- Paintings
- Archaeological collections
- Art pieces
- Drawings
- Commercial properties
- Non-urban agricultural land.
Amount of Exemption – Section 54F of Income Tax Act
The exemption available u/s 54F is proportionate to the cost of the new asset i.e.
Exemption under Section 54F of Income Tax Act = LTCG X (Cost of New Asset/Net Consideration) subject to the maximum of LTCG.
However, as per the update in the Union Budget 2023, where the cost of the new house exceeds Rs. 10 crores, the amount in excess of Rs. 10 crores will not be considered for computation of the exemption under section 54F of Income Tax Act. This modification has been introduced w.e.f. 1st April, 2024.
There will be a lock in period of 3 years from the date of construction or purchase of the residential property.
Difference between Section 54 and Section 54F of Income Tax Act
The major differentiator between section 54 and 54F is that section 54 of Income Tax Act deals with the exemption of LTCG on account of sale of a residential property for purchase of another residential property. However, section 54F deals with the exemption of LTCG on account sale of any long term capital asset other than residential property for sale of a new residential property.
Conditions to be fulfilled u/s 54F
Exemption u/s 54F will be allowed only if the following conditions are fulfilled:-
- The assessee does not own more than 2 residential house properties including the new property on the date of transfer of original asset.
- The assessee purchases residential property within 2 years of sale or constructs within 3 years any house property other than the new house.
- The property should be intended for residential use.
In the case of CIT v/s Sambandam Udaykumar (2012), the Karnataka High Court emphasized that “construction” of the new house does not have to be fully completed within the time limit, as long as substantial construction is done.
Consequences of non-compliance
There will be reversal of the exemption provided to the assessee in the following cases:-
- If the assessee fails to purchase a residential property within 2 years of sale of fails to construct within 3 years, then the proportion of capital gains exempted earlier shall be taxable in the year of such purchase or construction.
- If the assessee has transferred the new asset within 3 years, then the proportion of capital gains exempted earlier shall be taxable in the year in which such asset is transferred.
- If the assessee fails to utilize the deposit under the Capital Gains Deposit Account Scheme, then the proportion of capital gains exempted earlier shall be taxable in the year where the period of 3 years from the date of transfer of the original asset expires.
In the case of Fathima Bai v. ITO (2009), the Karnataka High Court ruled that the taxpayer can claim Section 54F exemption if the investment in a new residential property is made before the due date for filing the income tax return, not necessarily within the financial year of sale.
Illustrations for computation of exemption u/s 54F
Sales Consideration – Rs. 50 lakhs
Cost of acquisition – Rs. 10 lakhs
LTCG – Rs. 40 lakhs
Case I – When the entire net sales consideration is invested in purchase of residential house property.
If the entire net sales consideration is invested in purchase of residential house property, then the exemption u/s 54F will be allowed on the full LTCG amount of Rs. 10 lakhs.
Case II – When only Rs. 40 lakhs is invested in purchase of residential house property.
Exemption u/s 54F will be proportionate – (Rs. 40 lakhs/Rs. 50 lakhs * 10 lakhs) – Rs. 8 lakhs.
Therefore, only exemption of Rs. 8 lakhs will be allowed under section 54F of Income Tax Act.
CGAS Scheme
The Capital Gains Account Scheme (CGAS) allows individuals to save capital gains (from the sale of assets like property) and claim tax exemption under sections 54, 54F, and 54EC of the Income Tax Act, 1961. Instead of immediately reinvesting the gains, taxpayers can deposit the proceeds into a designated account with authorized banks. This ensures that the exemption is retained even if the reinvestment is delayed.
Circular No. 471 and 672 – Section 54F of Income Tax Act
According to Circular No. 471 (October 15, 1986) & Circular No. 672 (December 16, 1993), the conditions for claiming exemption under Section 54F, emphasizing the need to invest in a new residential house within the specified time period.
FAQs of Section 54F of Income Tax Act
Q1. What if the capital assets that I have sold for purchase of a new house property have resulted in both STCG and LTCG incomes?
A1. The exemption u/s 54F will be applicable only the LTCG component of the income and will not be available on the STCG portion.
Q2. What happens if the capital gains are not used before the due date for filing returns?
A2. The unutilized capital gains should be deposited in a Capital Gains Account Scheme (CGAS) before the filing of the income tax return to maintain eligibility for the exemption.