Section 54F provides exemptions to a seller from capital gains tax arising from the transfer of a capital asset other than a residential house property. If a capital asset (other than the residential house) is sold after two years of purchase then one can avail tax exemptions by investing the gains in a new residential house.
Who can claim an exemption under Section 54F?
An Individual or a Hindu Undivided Family (HUF) can claim an exemption under Section 54F. This exemption is not allowed to a company or a firm.
When the exemption is allowed?
This exemption is allowed when:
- Taxpayer transfers a capital asset which is not a residential house property. It can be a plot of land, shares, gold, etc.
- On the date of transfer, the taxpayer does not own more than one house (other than the new house bought, within 1 year before the date of transfer, to claim an exemption under Section 54F).
- The property so transferred should be a long-term capital asset. In such a case, long-term capital gains arise from such transfer. The exemption is not available for short-term capital gains.
- Taxpayer buys or constructs a new residential house within the allowed time period.
- The new house should be held for at least 3 years from the date of purchase (or construction).
Where to invest?
The exemption shall be allowed only for the investment made in one house property situated in India. No exemption shall be allowed for the investment made in overseas or foreign property.
When to invest?
The taxpayer can invest capital gains to purchase or to construct a new house. The investment of capital gains per se is sufficient to become eligible for exemption under Section 54F. If the taxpayer pays the entire purchase price but does not get the property registered in his name before time-limit, he is still eligible to claim the exemption.
[Purchase of new house] The capital gains should be invested to purchase new house property within 1 year before, or 2 years after, the date of transfer of capital asset. Example, if the asset is sold on April 15, 2019, the new house should be purchased anytime between April 16, 2018 and April 14, 2021.
[Construction of new house] The capital gains should be invested in the construction of new house property within 3 years after the date of transfer of capital asset. Example, if the asset is sold on April 15, 2019, the new house should be constructed anytime between April 15, 2019 and April 14, 2022.
Though a taxpayer has a long window to invest the capital gains, yet if he does not purchase or construct the house property before the due date for filing his return income (for the year in which asset is sold) he has to deposit the capital gains in a special deposit account opened with a nationalized bank.
Further, the new house so purchased or constructed should be held by the owner for at least 3 years from the date of purchase (date of completion of construction). Otherwise, the tax exemption shall be withdrawn.
What is special deposit account?
It would not be practical for the Income-tax department to wait for 2 to3 years (time limit allowed to purchase or construct a house) to tax the capital gains if the taxpayer fails to invest the money in the new house. Therefore, a taxpayer is required to deposit the capital gains in a ‘Capital Gains Deposit Account Scheme’ if he could not invest the money in a new house on or before the due date for filing of return of income (generally July 31 or September 30 after the end of the financial year). The amount invested in such deposit account is also considered for computation of Section 54F exemption.
The taxpayer can withdraw the money from such deposit account for further investment in the new house. If he could not utilize the money for stipulated purposes, the unutilized amount is taxed in the year in which time limit of 3 years expires to the extent of the following:
Amount of exemption?
The amount of exemption to be allowed to a taxpayer under Section 54F shall be lower of the following:
- Actual capital gains arising from the transfer of capital asset
- Cost of new house X Capital Gains / Net Sales Consideration
Is Section 54F tax exemption allowed for investment in two houses?
The tax exemption under Section 54F is allowed only in respect of investment made in one house property. If the capital gain is invested in more than one house, the taxpayer can choose that house which has higher investment for computation of Section 54F exemption.
What if the new house is transferred for which Section 54F exemption is claimed?
The exemption given under Section 54F shall be withdrawn if the taxpayer transfers the new asset within 3 years from the date of acquisition (date of purchase or date of completion of construction). The exemption claimed under Section 54F is withdrawn by way of treating the exemption granted earlier under Section 54F as long-term capital gains of the year in which new house is transferred. Capital Gain/loss on the transfer of the new house will be chargeable to tax under the head capital gain.
For instance, if new house property is sold after 2 years but before 3 years, such house shall be considered as long term capital asset. The exemption claimed under Section 54F shall be taxable as long-term capital gain in the year in which new house is transferred. The long-term capital gains from new house shall be computed in a routine manner.
What if the taxpayer buys a second new house after claiming an exemption under Section 54F?
If taxpayer purchases, within 2 years from the date of transfer of original asset, or constructs, within 3 years from the date of transfer of original asset, a residential house other than the new house, he becomes disqualified to claim the exemption under Section 54F. Consequently, the exemption granted earlier, at the time of purchase or construction of the first house, shall be taxable as long-term capital gains in the year in which the second house is purchased or constructed.
Whether Section 54F exemption is available if gold and jewellery are transferred?
Exemption under Section 54F is allowed if any long-term capital asset (other than a residential house property) is transferred. Thus, where gold jewellery or a plot of land or any other capital asset is transferred then the exemption can be claimed under Section 54F.
Whether Section 54F exemption is available if the investment is made in bonds or shares?
Section 54F exemption shall not be available if the capital gain is invested in bonds or shares. However, there are other sections under which exemption can be claimed. Following table enumerates the eligible investments and the relevant provision to claim exemption from capital gain tax:-
|Nature of original asset||Nature of new asset||Exemption available under|
|Residential house||Residential house||Section 54|
|Residential house||Specified Bonds||Section 54EC|
|Residential house||Specified Shares||Section 54GB|
|Any other capital asset||Residential house||Section 54F|
|Any other capital asset||Specified Bonds||Section 54EC|
|Any other capital asset||Specified Shares||Section 54GB|