Applicable to: Individual or Hindu Undivided Family (HUF)
- The assessee must have transferred a long-term capital asset, excluding residential house property.
- The assessee must acquire one residential house within a prescribed time limit, and its income must be taxable under Section 22.
- The new house should be situated in India.
- The assessee should not own more than one residential house property, the income of which is taxable under Section 22 (other than the new house), on the date of transfer.
- The assessee should not purchase another residential house or construct one within 2 years or 3 years, respectively, after the transfer of the original asset, the income of which is taxable under Section 22.
Time Limit for Acquisition of New Assets
- For Purchase: Within a period of '1 year before or 2 years after the date of transfer.'
- For Construction: Within a period of 3 years after the transfer. Construction may start at any time but must be completed within the stipulated time.
In the case of compulsory acquisition, the time limit starts from the date of the initial receipt of compensation.
Scheme of Deposit
Applicable. Refer to the 'Capital Gains Account Scheme.'
Amount of Deduction
Amount of Exemption Available under Section 54F
Under Section 54F of the Income Tax Act, the amount of exemption available for long-term capital gains on the sale of a capital asset other than a residential house property depends on whether the full net consideration or a proportionate net consideration is invested in eligible assets, such as a residential property.
From 1st April 2023, the maximum deduction available under Section 54F is up to Rs. 10 crores. Earlier, there was no cap on the tax exemption made u/ Sec 54F.
Here's how the exemption amount is determined:
When Full Net Consideration is Invested
If the taxpayer reinvests the entire net consideration (i.e., the full value of consideration received minus expenditure) from the sale of the capital asset in the purchase or construction of a residential property as per the specified conditions and within the prescribed time frame, the full amount of the long-term capital gain is exempt from taxation. In this case, the taxpayer can claim a complete exemption on the capital gain.
When Proportionate Net Consideration is Invested
If the taxpayer reinvests only a proportionate part of the net consideration in the purchase or construction of a residential property, the exemption amount is determined as follows:
Exemption = (Long-term capital gain * Amount reinvested) / Net consideration
The "Full Value of Consideration" represents the total amount received by the taxpayer for transferring the capital asset. This includes any monetary consideration or value received in kind.
The "Expenditure" refers to expenses that are incurred wholly and exclusively in connection with the transfer of the capital asset. These expenses can include legal fees, brokerage fees, and other costs directly related to the transfer.
Revocation of Benefit and Its Treatment
If the newly acquired residential house is transferred within 3 years after its acquisition, the benefit availed earlier shall be revoked.
If another residential house is purchased or constructed by the assessee within 2 years or 3 years, respectively, after the date of transfer of the original asset, the benefit availed earlier shall be revoked.
Tax Point: The time limit shall be determined from the date of transfer of the original asset, even in cases where the asset is compulsorily acquired by the Government.
If the amount held in the Capital Gains Deposit Account Scheme (1988) is unutilized, the benefit availed earlier shall be revoked.
Treatment of Revoked Income:
Revocation due to cases 1 and 2 above:
Such revoked income (exemption) shall be taxable as long-term capital gain in the year of the revocation of the condition.
Revocation due to case 3 above:
- Chargeable amount shall be calculated as follows:
- Unutilized amount for which benefit under Section 54F is availed multiplied by Original capital gain divided by Net sale consideration.
This amount is taxable as long-term capital gain in the previous year in which 3 years from the date of transfer of the asset expires.
Circumstances in which Exemption under Section 54F is Not Available
Section 54F provides exemptions for long-term capital gains on the sale of capital assets other than residential house property when the taxpayer invests the proceeds in a residential house. However, there are specific scenarios in which the Section 54F exemption is not applicable:
Ownership of More than One Residential House: If a taxpayer owns more than one residential house on the date of transferring the long-term asset, they are not eligible for the tax exemption under Section 54F. The section is designed to encourage individuals to invest in a single residential house, and owning multiple residential properties disqualifies them from this benefit.
Purchase of Another Residential House within One Year: If a taxpayer purchases another residential house within one year from the date of transferring the long-term asset, they are not eligible for the Section 54F exemption. The intent of the section is to provide an opportunity for individuals to acquire a new residential house using the proceeds from the sale of their original asset. Purchasing another residential house within a year goes against this intent.
Construction of More than One Residential House within Three Years: If a taxpayer constructs more than one residential house within three years from the date of transferring the long-term asset, they are not eligible for the Section 54F exemption. Similar to the previous point, this provision aims to promote the acquisition of a single residential house through construction or purchase. Constructing multiple houses within the stipulated period does not align with the section's objectives.
In summary, Section 54F provides tax exemptions for individuals who invest in a single residential house using the proceeds from the sale of a long-term capital asset, excluding residential property. Owning multiple residential houses, purchasing another residential house within one year, or constructing more than one residential house within three years after the transfer of the original asset disqualifies taxpayers from availing the exemption under Section 54F.