When you sell an asset (other than a residential house) and use the full sale amount to buy or build a new home, you can claim a tax exemption under Section 54F of the Income Tax Act. This section is designed to support investment in housing while offering relief on long-term capital gains tax. In a recent decision, the Income Tax Appellate Tribunal (ITAT) Delhi ruled that taxpayers can claim multiple-year exemptions under Section 54F for an under-construction property. It clarified that investing capital gains more than once towards the same house can still qualify for the benefit.
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.
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.
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.
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 the calculation would look:
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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How is Section 54 different from Section 54F?
Section 54 applies to long-term capital gains from the sale of a residential house, while Section 54F pertains to gains from assets other than residential houses. Both are available to individuals and Hindu undivided families (HUFs). However, Section 54 requires reinvestment in another residential house within a specific timeframe, whereas Section 54F allows investment in a residential house or construction, but within different timeframes. Both sections aim to incentivise investment in residential property to reduce capital gains tax.
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What is the eligibility to claim exemption under Section 54F?
Under Section 54F of the Income Tax Act, 1961, exemption on long-term capital gains from assets other than residential houses is available to individuals and Hindu Undivided Families (HUFs). To claim the exemption, the assessee must purchase or construct a residential house in India within one year before or three years after the original asset's transfer. The new residential house, termed the new asset, must cost equal to or more than the net consideration from the original asset. However, the provision does not apply if the assessee owns more than one residential house (apart from the new asset) at the time of transfer or acquires another residential house within a year post-transfer.
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.
How much capital gains exemption is available under Section 54F?
Under Sec 54F of Income Tax Act, individuals, and Hindu Undivided Families (HUFs) can claim full exemption on long-term capital gains (other than from a residential house) by investing the entire net sales consideration in either purchasing or constructing a residential house in India. The investment should be made within 1 year before or 2 years after the transfer date for purchasing, and construction must be completed within 3 years post-transfer.
What are the exceptions to the capital gains exemption under Section 54F?
Exceptions to the capital gains exemption under Section 54F of the Income Tax Act are as follows: The exemption is limited to individuals or Hindu Undivided Families (HUFs) and applies solely to long-term capital assets other than residential houses. To claim an exemption, the taxpayer must invest the net consideration in purchasing or constructing a residential house in India within specified time frames. However, an exemption is unavailable if the taxpayer owns more than one residential house upon transfer or purchases an additional residential house within one year post-transfer.
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:
- Tax savings: Provides significant tax relief on long-term capital gains by reinvesting in residential property.
- Promotes homeownership: Encourages investment in residential properties, boosting the real estate market.
- Investment flexibility: Allows investment in either a new or constructed residential property.
- Economic boost: Supports economic growth by stimulating the real estate sector.
- 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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