What is Section 54F of the Income Tax Act?
Section 54F of the Income Tax Act allows individuals to claim an exemption on long-term capital gains earned from selling long-term capital assets like jewelry, shares, and other capital assets except for house property if such sale proceeds are reinvested for the purpose of purchasing or constructing a house.
The proceeds from the sale of capital assets like gold, jewelry, and other capital assets are subject to tax in the hands of the taxpayer.
However, if such sale proceeds are reinvested for the purchase or construction of a house property, then such gains can be claimed as an exemption under section 54F. However, there are certain conditions that must be fulfilled in order to claim this exemption.
The maximum deduction u/s 54F is capped at Rs.10 crore. This shall be effective from 1st April 2024.
Key conditions to qualify for exemptions under Section 54F :
Key conditions to qualify for exemptions under Section 54F include:
Type of Taxpayer:
Applicable to both individuals and HUFs.
The capital gain results from the transfer of long-term capital assets other than a residential house.
Ownership of Assets:
The taxpayer should not own more than one house.
The residential house must be purchased within one year before the sale or two years after the sale of the capital asset. If constructing a house, completion must occur within three years from the sale. Otherwise, the exemption can be withdrawn.
The residential house cannot be sold within three years of purchase, or else the exemption will be revoked.
Time of sale:
If any other house is purchased within one year from the sale of the capital asset or the construction of another house is completed within three years, the exemption will be withdrawn.
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If the taxpayer fails to utilize the sale proceeds for buying or constructing the house before the due date for e filing Income Tax Return (ITR), the proceeds must be deposited in a ‘Capital Gains Account’ with a bank.
Assets for which Section 54F exemption is available
- Shares and Securities
- Land or property other than residential houses
- Jewelry, archaeological collections, drawings, paintings, or any art piece
Eligbility Conditions for Sale
Reinvesting the sale consideration: Section 54F exemption limit is subject to the amount of sale consideration that is reinvested for the purchase or construction of a new residential property. If the entire sum is reinvested, the full amount is exempt. Similarly, if a portion of the sale proceeds is reinvested, the exemption under section 54F is allowed proportionately. Starting 1st April 2024, the maximum deduction under section 54F is capped at Rs.10 crore.
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Investment Period: The new residential property must be purchased either 1 year before or 2 years after the sale of the asset, or its construction should be completed within 3 years of the sale of the old asset.
The taxpayer should not be in possession of or own any other residential house property on the date of sale except the one purchased for claiming exemption.
The taxpayer should not purchase any other house within 2 years or construct within 3 years from the date of transfer.
Lock-in Period: The new property invested in should not be sold within 3 years of purchase or construction
How to Calculate Exemption u/s 54F?
- Exemption u/s 54F is available to the amount invested proportionate amount of sales consideration. It can be arrived using the formula below.
- 54F Exemption = Capital Gains * Amount invested in residential property / Net Sale Consideration
What is Capital Gain Account Scheme (CGAS)?
A Capital Gain Account Scheme, or CGAS, is a governmental scheme that allows taxpayers to park their capital gains in the CGAS account and secure their exemption under sections 54 and 54F if they are not able to reinvest the capital gain proceeds immediately.
Here’s an example: Mr. Ravi had capital gains of Rs.10 lakhs from the sale of property on 23rd March 2023. However, the date of the ITR filing was close, and he couldn’t reinvest this amount in a new property in such a short time. So, he kept the capital gains in a CGAS account, which enabled him to claim the exemption under sections 54 and 54F.
