Section 54F of Income Tax Act - Long-term Capital Gains (LTCG) Tax Exemption U/S 54F

Section 54F of the Income Tax Act is a provision that helps taxpayers reduce their tax liability on long-term capital gains. It applies when an individual or a Hindu Undivided Family (HUF) sells a long-term capital asset other than a residential house, such as shares, land, or jewellery, and reinvests the sale proceeds into a new residential house in India. If the conditions laid down under this section are met, the capital gains arising from the sale can be either fully or partially exempt from tax.

To claim this benefit, the taxpayer must invest the net sale consideration in a single residential property located in India. There are clear timelines for purchasing or constructing the new house, and strict rules regarding ownership of other residential properties at the time of sale. If the funds are not utilised before the due date for filing the income tax return, they must be deposited in a Capital Gains Account Scheme (CGAS).

From Assessment Year 2024–25 onwards, the maximum exemption that can be claimed under Section 54F is limited to Rs. 10 crore. The exemption is calculated based on how much of the sale proceeds are reinvested. If certain conditions are violated later, such as selling the new house within three years, the exemption claimed earlier may be withdrawn.

In this article, we will walk you through the meaning of Section 54F, the exemption available under Section 54F, and the method to calculate benefits under Section 54F of the Income Tax Act.

What is Section 54F of the Income Tax Act?

Section 54F of the Income Tax Act allows individuals and HUFs to save tax on long-term capital gains earned from selling assets other than a residential house. These assets may include shares, jewellery, gold, or land. Normally, the gains from such sales are taxable. However, if the taxpayer uses the sale proceeds to buy or construct a residential house in India within the specified time limits, the capital gains can be exempt under Section 54F. This exemption is available only when all the prescribed conditions under the section are properly followed.

Who can claim exemption under Section 54F?

Section 54F provides tax relief to specific categories of taxpayers who reinvest their capital gains in a residential property. The exemption can be claimed only if certain eligibility conditions are fulfilled.

Eligible taxpayers

• Individuals
• Hindu Undivided Families (HUFs)

Key conditions to claim exemption

• The capital gain must arise from the sale of a long-term capital asset other than a residential house.
• The taxpayer should not own more than one residential house on the date of transfer of the original asset.
• The new residential house must be:
  • Purchased within one year before or two years after the date of sale, or
  • Constructed within three years from the date of sale.
• The newly acquired residential house must not be sold within three years of purchase or completion, failing which the exemption will be cancelled.
• If the taxpayer purchases another residential house within one year of sale or completes construction of another house within three years, the exemption will be withdrawn.
• If the sale proceeds are not used before the due date of filing the Income Tax Return, the unutilised amount must be deposited in a Capital Gains Account Scheme with an authorised bank.

Assets for which Section 54F exemption is available

Section 54F exemption can be claimed on capital gains arising from the sale of long-term assets other than residential house property. These include:

• Shares and securities
• Land or immovable property that is not a residential house
• Jewellery, archaeological collections, paintings, drawings, or other works of art

The exemption applies only when the gains from these assets are reinvested in a residential house as per the specified conditions.

Eligibility to claim exemption under Section 54F

Section 54F offers tax exemption on profits earned from selling any asset other than a residential property, provided certain conditions are met:

• The seller must reinvest the total sale proceeds into a new residential house.
• The new home must be:
  • Bought: within 1 year before or 2 years after selling the original asset, or
  • Built: within 3 years from the date of sale.
• On the date of selling the original asset, the taxpayer should not own more than one residential property, apart from the one they are investing in.
• No other residential house should be purchased within 2 years or constructed within 3 years from the sale date.

If these rules are not followed, the exemption claimed earlier becomes taxable in the year when a second property is bought or built. Also, from 1st April 2024, the maximum deduction allowed under Section 54F is limited to Rs.10 crore.

How much capital gain exemption is available under Section 54F?

The amount of exemption available under Section 54F depends on how much of the sale proceeds are reinvested in a residential house. The exemption can be either full or partial, based on the proportion of reinvestment.

Understanding the exemption with an example

Suppose an investor sells a long-term capital asset for Rs. 50 lakh and earns a long-term capital gain of Rs. 10 lakh. The investor plans to use the sale proceeds to purchase or construct a residential house.

Scenario 1: Full reinvestment of sale proceeds

If the investor reinvests the entire net sale consideration of Rs. 50 lakh into a new residential house, the full capital gain of Rs. 10 lakh will be exempt under Section 54F. In this case, no tax will be payable on the long-term capital gains, provided all other conditions are satisfied.

Scenario 2: Partial reinvestment of sale proceeds

If only a part of the sale proceeds is used for purchasing or constructing the residential house, the exemption will be allowed on a proportionate basis. The remaining portion of the capital gain will be taxable.

The exemption is calculated using the following formula:

Exemption under Section 54F

= (Amount reinvested ÷ Net consideration) × Long-term capital gain

Calculation example

If the investor reinvests Rs. 40 lakh out of the total sale consideration of Rs. 50 lakh, the exemption will be calculated as follows:

(40 lakh ÷ 50 lakh) × 10 lakh = Rs. 8 lakh

In this case, Rs. 8 lakh will be exempt from tax, while the remaining Rs. 2 lakh will be taxable as long-term capital gains.

How to calculate exemption u/s 54F?

To find out how much exemption you can claim under Section 54F, you need to look at how much of your sale money has been used to buy a new residential property. There is a simple formula to work this out:

54F Exemption = (Capital Gains × Amount invested in new house) ÷ Net Sale Price

Let us understand this better with an example.

Note:

From 01 April 2024, there’s a new rule for those claiming exemption under Section 54F. If you invest more than Rs. 10 crore in buying a new residential house, the exemption amount will still be limited to Rs. 10 crore. So even if your investment is higher, the Income Tax Department will consider only up to Rs. 10 crore while calculating the exemption.

Example

Imagine Mr. Das sells his land to Mr. Singh on 14 August 2024 for Rs. 5 crore. Mr. Das had originally bought this land back in June 2020 for Rs. 50 lakh. After selling the land, he used Rs. 3 crore to buy a new residential property in August 2025. Also, Mr. Das did not own any house on the date he sold the land.

Since Mr. Das held the land for more than two years, it is treated as a long-term capital asset. This allows him to use indexation to adjust his purchase cost.

He can claim exemption under Section 54F because:

• He sold a long-term capital asset that was not a residential house.
• He did not own any other residential property when he made the sale.
• He bought a new house within two years using the sale money.

Here is how capital gains are calculated

Particulars	Amount (Rs.)
Sale price	5,00,00,000
Indexed cost of purchase (50,00,000 × 363 ÷ 301)	60,20,900
Long-term capital gains	4,39,70,099
Exempt capital gains (4,39,70,099 × 3,00,00,000 ÷ 5,00,00,000)	2,63,82,060
Taxable capital gains	1,75,88,039

Since the exemption limit is up to Rs. 10 crore, Mr. Das can claim the full exemption that he is eligible for in this case.

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Differences Between Section 54 and 54F

Although Section 54 and Section 54F both offer capital gains tax exemption benefits, they apply to different types of assets and come with distinct rules. Here’s a detailed comparison of the two sections:

Basis of difference	Section 54	Section 54F
Type of asset sold	This exemption is available only if the asset sold is a residential house.	This exemption applies if you sell any capital asset except a residential property (e.g., land, gold, shares).
How exemption is calculated	The full amount invested in the new residential house can be claimed as exemption.	The exemption is based on the proportion of the sale amount reinvested in the new property.
Number of properties allowed	You can invest in two houses and still claim the exemption once, provided the capital gain is within Rs. 2 crore.	This section doesn’t allow the option to invest in two properties – only one is permitted.
Maximum exemption limit	The upper limit on exemption is Rs. 10 crore.	The exemption is also capped at Rs. 10 crore, even if the investment is more.

Understanding these differences can help you choose the right section to claim benefits when reinvesting your capital gains.Looking to invest in residential property for tax benefits? Bajaj Housing Finance Home Loan provides approval within 48 hours* and flexible tenures of up to 32 years. Check your loan offers today. You may already be eligible, find out by entering your mobile number and OTP.

What is “Net Consideration” under Section 54F?

Under Section 54F of the Income Tax Act, "Net Consideration" refers to the total sale proceeds received from the transfer of a capital asset, after deducting any expenses directly related to the sale, such as brokerage, legal fees, or commission. This amount is crucial for calculating the tax exemption on capital gains. To qualify for the exemption, the taxpayer must reinvest the net consideration into purchasing or constructing a residential property within the specified time limit, allowing them to defer or avoid capital gains tax on the sale of the original asset.

What is the Capital Gains Account Scheme (CGAS)?

The Capital Gains Account Scheme (CGAS), instituted under the Income Tax Act in 1988, offers tax relief to individuals with capital gains from asset sales. It facilitates the reinvestment of capital gains into specified assets, exempting them from capital gains tax under sections 54 to 54GB. In cases where reinvestment time exceeds the income tax return deadline, CGAS provides a solution. Taxpayers can deposit unutilised capital gains into a dedicated account akin to a fixed deposit, solely for claiming exemptions under relevant sections of the Income Tax Act.

Case study on Section 54F of Income Tax Act

Background of the case

A taxpayer sold his commercial property and used the money to build a farmhouse. For this investment, he claimed a deduction of Rs. 47.84 lakh under Section 54F for the financial year 2008-09. Later, in 2010-11, he sold five more properties and invested that money again in the same farmhouse project at Mehandi Farms. This time, he claimed a deduction of Rs. 1.59 crore under Section 54F in his income tax return.

Under Section 54F, a person cannot claim the benefit if they already own more than one residential property, apart from the new one being built or purchased, at the time of selling the original property. In this situation, the taxpayer owned one house at D-3/8, Vasant Vihar, Delhi, which was rented out. Meanwhile, the farmhouse at Mehandi Farms was still under construction when he sold the five properties.

Tribunal’s decision

The Income Tax Appellate Tribunal (ITAT) Delhi ruled in favour of the taxpayer, allowing him to claim the Rs. 1.59 crore deduction.

It was noted that on the date he sold the commercial properties, the taxpayer only had one house at Vasant Vihar, which he was not using as his residence. Instead, he was living with his family at another property in Naraina Vihar, New Delhi, registered in the name of his Hindu Undivided Family (HUF).

Since the Vasant Vihar property was rented out (and rental income was reported accordingly) and the farmhouse was still incomplete, the taxpayer was considered eligible. Even if the Vasant Vihar house was counted, he did not own any other completed residential property on the date of transfer. Hence, the deductions of both Rs. 47.84 lakh and Rs. 1.59 crore were allowed under Section 54F.

Key lessons from this case

• Section 54F does not limit how many times a taxpayer can claim a deduction for the same property, provided the property cost and total capital gains stay within the limit (Rs. 10 crore in this case).
• As long as the taxpayer owns no more than one residential property (excluding the new one) on the date of transfer and for a specified period after transfer (2 years for purchase and 3 years for construction), the benefit can be availed.
• In this case, the farmhouse was still under construction, and the taxpayer had no more than one other residential property. Thus, he successfully claimed deductions across two different years for investments made in the same farmhouse project.

Key benefits of Section 54F of the Income Tax Act

Here are the key benefits of Section 54F of the Income Tax Act:

1. Tax savings: Provides significant tax relief on long-term capital gains by reinvesting in residential property.
2. Promotes homeownership: Encourages investment in residential properties, boosting the real estate market.
3. Investment flexibility: Allows investment in either a new or constructed residential property.
4. Economic boost: Supports economic growth by stimulating the real estate sector.
5. Benefits NRIs: Offers tax exemptions for Non-Resident Indians (NRIs) on capital gains from non-residential property sales.

These benefits make Section 54F a valuable provision for taxpayers looking to optimize their investments and reduce tax liabilities.

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Section 54F of the Income Tax Act provides valuable opportunities for individuals seeking to minimise tax liabilities while investing in new residential property. By reinvesting capital gains into a new home, individuals can leverage this exemption to effectively manage their tax obligations. For those looking to finance their next property purchase, home loans offer the financial flexibility needed to maximise the benefits of Section 54F, creating a strategic pathway towards tax savings and financial growth. Proper understanding and utilisation of this section can empower homeowners to make well-informed decisions, securing their financial future.

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