Your Guide to Section 54F of the Income Tax Act
Find out how Section 54F of the Income Tax Act can help you save on taxes while selling property. Explore eligibility criteria, conditions, and benefits!
Understanding Section 54F of Income Tax Act – Capital Gains Exemption
Owning a residential house is more than a dream for many individuals—it has become a fundamental need. Our Indian Government is making all the efforts to make this dream a reality through initiatives like "Housing for All."
Along with these, the GOI has also introduced tax exemptions to support affordable housing goals, with Section 54F being one such provision for long-term capital gains.
In the article, we’ll explain what Section 54F is, who can benefit from it, and how you can use it to save money on your taxes when filing ITR.
What is Section 54F of the Income Tax Act?
Section 54F of the Income Tax Act offers tax benefits to individuals who have earned long-term capital gains (LTCL) from the sale of any capital asset (shares, gold, jewelry, or bonds) except house property.
Let’s understand this with an example.
Asset Bought | Amount |
No. of shares bought | 10,000 |
Per unit purchase price | ₹ 100 per unit |
Total cost of purchasing the shares | ₹ 10 lakhs |
Selling price of the shares | ₹ 200 per unit |
Total amount received on the sale of 10,000 units | ₹ 20 lakhs |
Earned Long Term Capital Gains (LTCG) | ₹ 20 lakhs - ₹ 10 lakhs = ₹ 10 lakhs |
To qualify for tax exemption under Section 54F, these gains must be reinvested in purchasing or constructing a house property. But if these are reinvested besides residential property, the gains become taxable, and the exemption cannot be availed.
What Is The Difference Between Section 54 and Section 54F?
Section 54 provides an exemption for long-term capital gains arising from the residential property sale. On the contrary, Section 54F offers an exemption for long-term capital gains (LTCL) from any asset sale other than a residential property.
Mandatory Conditions To Fulfill For Availing Exemption u/s 54F
The below conditions need to be fulfilled to claim the exemption u/s 54F.
The exemption eligibility extends to only individuals and HUFs.
Ownership of only one house (other than the one being purchased for exemption) is permissible.
The residential property must be purchased within one year before or two years after the date of the capital asset's sale.
If opting for house construction, completion must occur within three years from the date of selling the capital asset.
The exemption u/s 54F will be revoked if another residential property is purchased within one year from the capital asset's sale or if construction on another property is initiated within three years.
When the sale proceeds cannot be utilized immediately, transferring them to a designated 'capital gains account' with a bank is necessary.
What Portion of Capital Gain Is Exempted under Section 54F?
Let’s take a practical example to determine how much tax exemption an individual gets under section 54F.
Rahul sold an asset for ₹ 70 lakh and made a profit (capital gains) of ₹ 10 lakh. Now, he is planning to use this money to buy or construct a residential property.
Scenario 1: Full Reinvestment
He decides to invest the entire ₹ 70 lakh from the asset sale into the new residential property. This means Rahul will get a full tax exemption on the capital gains and will not have to pay any tax on that ₹ 10 lakh profit.
Scenario 2: Partial Reinvestment
When only a portion of the sale proceeds is reinvested, the capital gains exemption is calculated based on the proportion of the amount reinvested.
In this case, Rahul reinvests ₹ 40 lakh out of the total sale proceeds of ₹ 70 lakh. The exempted capital gains would be calculated using the formula below.
Exemption under Section 54F = (Amount Re- Invested / Net Consideration) * Long Term Capital Gain |
₹ 40 lakh / ₹ 70 lakh * ₹ 10 lakh = ₹ 6.67 lakh
The capital gains exemption under Section 54F would amount to ₹ 6.67 lakh.
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Frequently Asked Questions (FAQs)
Who is eligible to claim exemption u/s 54F of the Income Tax Act?
individuals and Hindu Undivided Families (HUFs) can claim an exemption under Section 54F of the Income Tax Act if they fulfill the following conditions:
They must own up to one residential house other than the one purchased or constructed for exemption.
The capital gains must arise from the sale of any asset other than a residential property.
The entire sale proceeds or a portion thereof must be reinvested in purchasing or constructing a residential property within the specified time frames.
2. Are NRIs eligible to claim exemption u/s 54F?
Yes, NRIs are eligible to claim exemption u/s 54F if the property they sold and the new house they're buying or building are both in India.
3. What is the exemption limit for Section 54F?
As per the Union Budget 2023 on April 1, 2023, the exemption limit under Section 54F is set at up to Rs. 10 crores.
4. Can the benefits of Section 54F and Section 54 claimed simultaneously?
No, you can't. Section 54 applies specifically when you sell a house property, whereas Section 54F doesn't cover sales of residential properties. Therefore, you can't claim benefits from both sections simultaneously.
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