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Section 54F of Income Tax Act – Capital Gain Exemption

Introduction

The Income-tax Act allows exemption from capital gains tax if the amount of capital gains or sale consideration, as the case may be, is further invested in specified new assets.

These exemptions are as under the following sections:
a) Section 54- Capital Gain arising from the transfer of residential house property
b) Section 54B- Capital Gain arising from the transfer of land used for agricultural purpose
c) Section 54D- Capital Gains on compulsory acquisition of land and building, forming part of industrial undertaking
d) Section 54EC- Capital Gain not be charged on investment in certain bonds
e) Section 54EE- Capital Gain not to be charged on investment in units of a specified fund
f) Section 54F- Capital Gain on transfer of a long term capital asset other than a house property
g) Section 54G- Capital Gain arising on transfer of assets in case of shifting of industrial undertaking from the urban area
h) Section 54GA- Capital Gain arising on transfer of assets in case of shifting of industrial undertaking from the urban area to any Special Economic Zone
i) Section 54GB​- Capital Gain on transfer of residential property

Let’s quickly explain about capital gain exemption section 54F of the Income Tax Act.

 

What is Section 54F of Income Tax Act?

​Section 54F​ provides exemption for capital gains arising from the transfer of a long-term capital asset (other than a residential house property) if the gain is invested in one residential house property in India within the prescribed time limit.

Who is eligible to claim exemption under Section 54F?

​The exemption is available only to individuals and Hindu Undivided Families (HUFs). ​

What types of assets qualify for exemption from capital gain under Section 54F?

 

​​The exemption is available for long-term capital gains arising from the transfer of a capital asset other than a residential house property. Examples include jewellery, shares, securities, and plot of land. ​

What types of new assets are eligible for the exemption under Section 54F?

​The exemption is available if the net sale consideration is invested in one residential house property located in India. This can be achieved by purchasing or constructing the property. ​

What is the time limit for investing in the new asset?

To claim exemption under s​ection 54F, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer.

If the net consideration is deposited in a capital gain account scheme by the due date for the return of income, the assessee must purchase or construct a residential house within 2 or 3 years after the date of transfer of the original asset respectively.

What is the maximum amount of exemption allowed under section 54F?

​​The maximum amount of exemption allowed under s​ection 54F is as follows:

a) If net consideration is invested in new house property: If net consideration arising from the sale of the original asset is fully utilised to purchase or construct a residential house or deposited in a Capital Gains Account Scheme, the entire capital gain will be exempt from taxation.

b) If partial consideration is invested in new house property:If net consideration arising from the sale of the original asset is not fully utilised to purchase or construct a residential house or deposited in a Capital Gains Account Scheme, the exemption will be granted in proportion to the amount invested, as follows:

A x B/C

Wherein,

A = Investment in residential house plus amount deposited in capital gain account scheme. However, the total amount cannot exceed Rs. 10 crores (Refer Note)

B = Long-term Capital Gains

C = Net consideration from transfer of original asset

Note: If the total amount invested in the new house property and the amount deposited in the Capital Gain Account Scheme exceeds Rs. 10 crores, the threshold limit will be adjusted first with the amount invested in the new house property. If the investment in the new house property is less than Rs. 10 crores, the remaining balance will be considered to be from the Capital Gain Account Scheme.

​Inserted by the Finance Act, 2023 with effect from assessment year 2024-25. Earlier, there was no threshold limit for making investment in new house property and depositing amount in capital gain account scheme.​

Under what circumstances is the exemption under Section 54F denied?

​The exemption may be denied if the assessee already owns more than one residential house on the date of transfer of the original asset, with the exception of a house that was acquired within one year prior to the transfer. This means that the assessee can own a total of two residential houses (one already owned and the other acquired within one year prior to the date of transfer under the scheme) and still be eligible for the exemption. If the assessee owns more than two residential houses, and the income from these houses is chargeable under the head income from house property, the exemption will not apply. ​

Under what circumstances can the exemption under Section 54F be forfeited?

​​The exemption claimed by assessee under s​ection 54F can be withdrawn in the following circumstances:

a) Acquisition of Second House: Where assessee purchases a residential house, other than the new house, within two years after the date of transfer of original asset or constructs a residential house, other than the new house, within three years after the date of transfer of original asset and the income from such house is chargeable to tax under the head Income from House Property, the exempted long-term capital gain becomes taxable in such previous year.

b) Non-Utilisation of amount deposited in capital gain account scheme:
Where amount deposited in capital gain account scheme is not utilised to purchase a residential house within 2 years after the date of transfer or to construct a residential house within 3 years of the date of transfer, the unutilised deposit shall be deemed to be long-term capital gain of the relevant previous year in which the time-limit of 3 years expires.

c)  Transfer of new house within 3 Years: If new house so purchased or constructed is transferred within a period of 3 years of its purchase/construction, the exempted capital gain becomes chargeable to tax as long-term capital gain in the relevant previous year in which the transfer takes place.

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