When you sell a long-term capital asset (other than a residential house), Section 54F of the Income Tax Act offers you a way to save tax — by investing the net sale consideration in a new residential house property in India. Let's explore the detailed provisions, conditions, and important restrictions associated with Section 54F.

Applicability of Section 54F

• Eligible Assessees: Individuals and Hindu Undivided Families (HUFs).
• Eligible Assets: Any long-term capital asset except a residential house.
• Purpose: To encourage investment in residential housing by offering capital gain exemption.

How the Exemption Works

1. Full Investment of Net Sale Consideration

If the entire net sale consideration (i.e., sale price minus transfer expenses) is invested in purchasing or constructing a new residential house, the entire long-term capital gain (LTCG) is exempt from tax.

Example:

• Sale price of old asset = ₹3.20 Crores
• Transfer expenses = ₹0.20 Crores
• LTCG = ₹2 Crores
• Cost of new asset = ₹4 Crores

Result: Since the entire net sale consideration of ₹3 Crores (3.2 – 0.2) is invested, the entire LTCG of ₹2 Crores will be exempt from tax.

2. Partial Investment of Net Sale Consideration

If only a part of the net sale consideration is invested (because the cost of the new house is less than the net consideration), the exemption will be proportionate.

Formula:
Exempted LTCG = Total LTCG × (Cost of New Asset / Net Sale Consideration)
Taxable LTCG = Total LTCG – Exempted LTCG

Example:

• Sale price of old asset = ₹6.20 Crores
• Transfer expenses = ₹0.20 Crores
• LTCG = ₹5 Crores
• Cost of new asset = ₹3 Crores

Calculation:

• Exempted LTCG = 5 × (3 ÷ 6) = ₹2.5 Crores
• Taxable LTCG = 5 – 2.5 = ₹2.5 Crores

Time Limit for Investment

• Purchase of New House:
  • Within 1 year before or 2 years after the date of sale.
• Construction of New House:
  • Within 3 years after the date of sale.

Restrictions and Important Conditions

Restriction 1: Ownership of Other Residential Houses

The exemption under Section 54F will not be available if the assessee:

• Owns more than one residential house (other than the new house) on the date of transfer, and/or
• Purchases another residential house (other than the new house) within 1 year after the date of transfer, and/or
• Constructs another residential house (other than the new house) within 3 years after the date of transfer.

The income from such additional houses must be chargeable under the head “Income from House Property”.

Illustrations for Restriction 1

Case A:

• Assessee owns no residential house on the date of transfer (01/05/2024).
• Result: Eligible for Section 54F exemption if other conditions are satisfied.

Case B:

• Assessee owns only one residential house on the date of transfer (01/05/2024).
• Result: Eligible for Section 54F exemption if other conditions are satisfied.

Case C:

• Assessee owns two houses on the date of transfer (01/05/2024).
• First Situation:
  • One house self-occupied, another let out and taxed under “Income from House Property.”
  • Result: Not eligible for Section 54F exemption.
• Second Situation:
  • Both houses self-occupied.
  • Result: Still not eligible because ownership of more than one house violates conditions (even if income is nil under Section 23(2)).

Case D:

• Assessee owns no house or only one house initially but subsequently:
  • Purchases any other residential house within 1 year or
  • Constructs any other residential house within 3 years.
• Result: Exemption shall be withdrawn, and LTCG shall be taxable.

Restriction 2: Cap of ₹10 Crores on Investment

Even if the net sale consideration and new house cost are higher, the maximum benefit under Section 54F is restricted to ₹10 crores.

Examples:

Example 1:

• Sale price = ₹13.20 Crores
• Transfer expenses = ₹1.20 Crores
• Net sale consideration = ₹12 Crores
• LTCG = ₹11 Crores
• New house cost = ₹14 Crores

Result: Exempted LTCG restricted to ₹10 Crores.
Taxable LTCG = 11 – 10 = ₹1 Crore.

Example 2:

• Sale price = ₹11.20 Crores
• Transfer expenses = ₹0.20 Crores
• Net sale consideration = ₹11 Crores
• LTCG = ₹9 Crores
• New house cost = ₹3 Crores

Result:

• Exempted LTCG = 9 × (3/11) ≈ ₹2.45 Crores
• Taxable LTCG = 9 – 2.45 = ₹6.55 Crores

Example 3:

• Sale price = ₹18.20 Crores
• Transfer expenses = ₹1.20 Crores
• Net sale consideration = ₹17 Crores
• LTCG = ₹11 Crores
• New house cost = ₹14 Crores (restricted to ₹10 Crores)

Result:

• Exempted LTCG = 11 × (10/17) ≈ ₹6.47 Crores
• Taxable LTCG = 11 – 6.47 = ₹4.53 Crores

Restriction 3: Acquisition of Another House After Claiming Exemption

If after claiming the exemption, the assessee:

• Purchases another residential house within 2 years or
• Constructs another house within 3 years (other than the house purchased for 54F benefit),

then the exempted LTCG will become taxable in the year the additional house is acquired.

Restriction 4: Sale of New Residential House Within 3 Years

If the new house purchased or constructed is sold within 3 years, then:

• The exemption claimed earlier will be withdrawn.
• The LTCG exempted will be taxed in the year of sale of the new house.

Capital Gains Account Scheme (CGAS)

If the net sale consideration is not fully utilized by the due date for filing Income Tax Return (ITR):

• The unutilized amount must be deposited into the Capital Gains Account Scheme (CGAS).
• Proof of such deposit should be attached with the ITR.

Important Points:

• The deposited amount (plus any utilized amount) will be treated as invested.
• If the deposited amount is not used within the allowed time (3 years for construction), the unutilized portion will be taxed as capital gain in the year in which 3 years expire.

Special Case:
Where net sale consideration exceeds ₹10 crores, the deposit under CGAS is restricted to ₹10 crores only.

Nature of the New Asset

• The new asset must be one residential house in India.
• Tax treatment on the future sale of the new house will be as per normal capital gains provisions.

Conclusion

Section 54F is a powerful tool for saving long-term capital gains tax by reinvesting into a residential property. However, the restrictions are strict and should be carefully adhered to. Special attention must be given to:

• Number of houses owned,
• Timing of purchase/construction,
• Limits on investment amount, and
• Proper deposit under CGAS if needed.

Missteps can lead to loss of exemption, resulting in heavy tax implications. Hence, proper planning is the key!

Tabular Summary of Section 54F

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Tabular Comparison of Section 54 Series from Section 54 to Section 54H

https://docs.google.com/spreadsheets/d/1CFQTLWZwergI_DWJOCpCroiYctlz7XpqqxwJhzg-V1Q/edit?usp=sharing

Hemant Sharma

Hemant, a distinguished Advocate and Chartered Accountant, brings over 14 years of exceptional expertise in high-stakes investigative assignments. His extensive portfolio includes conducting forensic audits, representing clients in investigations led by prominent agencies such as the CBI, ED, SFIO, and others, as well as handling critical Income Tax and GST intelligence matters. Armed with a robust academic and professional foundation—B.Com, M.Com, FCA, LL.B, DISA, FAFD, and CCCBA—Hemant embodies a rare blend of legal and financial acumen, making him a trusted authority in the field. Hemant can be contacted @ hemant.sharma53@gmail.com