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Exemption u/s 54F of the Income Tax Act

Neethi V. Kannanth 
on 23 February 2021

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There are various sections under the Income Tax Act,1961 which provides exemption from the long term capital gain. One such section is Section 54F of the Income Tax Act, 1961. Through this article let us understand about Section 54F.

What is section 54F?

Section 54F of the Income Tax Act, 1961, provides for the exemption of long term capital gain arising on account of transfer of any long term capital asset(referred as original asset) other than residential house property.

Exemption u/s 54F of the Income Tax Act

Criteria for obtaining exemption under section 54F

In order to avail exemption under section 54F of the Income Tax Act, 1961, the following criteria should be met-

  1. The assessee must be an individual or HUF
  2. The asset transferred must be any long term capital asset other than residential house property
  3. The net consideration received on transfer of long term capital asset must be utilized in the following manner-
  • Purchase of a new residential house property in India one year before the date of transfer or within 2 years from the date of transfer of long term capital asset
  • Construction of a new residential house property in India within 3 years from the date of transfer of the long term capital asset.
 

Meaning of Net Consideration

As per section 54F, net consideration means the full value of the consideration received on account of the transfer of long term capital assets reduced by any expenditure exclusively incurred in connection with the transfer.

Non availability of exemption under section 54F

The exemption under section 54F is not available in the following situation-

  1. The assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
  2. The assessee purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or
  3. The assessee constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

The income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head "Income from house property".

In case of any of the above situation, the amount of capital gain arising from the transfer of the original asset not charged to tax on the basis of the cost of such new asset or, as the case may be, shall be deemed to be the income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.

 

Amount of Deduction provided

Entire Net Consideration is invested

If the entire amount of the consideration is invested then the entire capital gain amount shall be exempted

Partial Investment of Net consideration

In case where only the partial amount of the net consideration is invested then the amount of exemption will be calculated on the following basis-

Exemption Amount= Long term capital gain * Amount re-invested / Net consideration

Investment in Capital Gain Account Scheme

If the amount is not invested or utilized for the purchase of new residential house property or construction of new residential house property before the date of filing of return under section 139(1) of the Income Tax Act, 1961, then the assessee should deposit such amount to the extent not utilized in the capital gain account scheme. The unutilized amount so deposited can be used for purchasing or constructing the residential house within the period of two years or three years.

If the assessee fails to utilize the amount within the specified period of two or three years, then, the unutilized amount would be treated as capital gain on proportionate basis based on exemption claimed earlier as per clause (a) and clause (b) of Section 54F(1) in the previous year in which the period expires.


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