Introduction
Section 54F of the Income Tax Act, 1961 provides an exemption from long-term capital gains (LTCG) on transfer of capital assets (other than residential house property) if the assessee invests the net consideration in the purchase or construction of a residential house within prescribed time limits. However, the section comes with certain restrictions on ownership or acquisition of other residential houses, which often creates interpretational issues, especially in scenarios involving joint ownership and under-construction flats.
This article addresses one such complex case involving multiple jointly owned residential properties and under-construction units, with specific focus on whether exemption under Section 54F can still be claimed.
Legal Text Snapshot: Proviso (a) to Section 54F(1)
To qualify for exemption, the assesseemust not:
- Own more than one residential house, other than the new asset, on the date of transfer;
- Purchase any residential house, other than the new asset, within a period of 1 year after the date of transfer; or
- Construct any residential house, other than the new asset, within a period of 3 years after the date of transfer.
If any of the above conditions are violated, exemption under Section 54F is not available.
Key Interpretation: "Owns More Than One Residential House"
The term "owns" here is interpreted strictly. The assessee must not hold more than one residential property (excluding the new asset) as on the date of transfer. Joint ownership of a residential house is still considered ownership unless it can be conclusively shown that the assessee has a negligible or no beneficial interest.
Thus, one existing jointly owned house + one new house (eligible investment) is permissible at the time of transfer, but ownership of a second house or acquisition of another house within the prohibited period may disqualify the claim.
Under-Construction Flats - When Do They Get Counted?
An important question arises when the assessee has booked under-construction flats prior to the date of transfer. If possession of such flats is received within 3 years from the date of transfer, they may be treated as constructed residential houses. Therefore, such possession can trigger disqualification under clause (a) (iii)of proviso to Section 54F(1), which restricts construction of any other residential house (other than the new asset) within three years.
Booking or allotment of an under-construction unit alone, prior to the date of transfer, does not result in disqualification. The test is based on actual possession or completion of the unit within the three-year window post-transfer.
Practical Case Analysis
Let us consider the following real-world scenario:
- The assesseejointly owns 1 residential house with his father since 2019 (self-occupied or let out).
- On 9th July 2024, he purchases a new flat in Goa jointly with his wife - this is the house intended for claim under Section 54F.
- Additionally, he had booked two under-construction flats in August 2020, for which he received possession on 1st March 2025 (within 3 years of the LTCG event).
- All properties are jointly held with family members.
In this scenario:
- As on the date of transfer of the original capital asset (shares), he only owns one existing residential house with his father - Clause (i) is satisfied.
- He has not purchased any other residential house (other than the Goa flat) within one year from the date of transfer - Clause (ii) is satisfied.
- However, since he has received possession of 2 constructed flats (other than the new asset) within 3 years, he violates Clause (iii).
Thus, as per Section 54F(2), the exemption earlier allowed would become taxable in the year in which the condition is violated - i.e., FY 2024-25 (AY 2025-26).
Can We Claim If Only 1 Additional Flat Was Received?
Had the assessee received possession of only 1 flat (other than the new asset) within the 3-year window, even that would lead to disqualification under clause (iii). This clause disallows any construction, not just multiple.
So, even a single under-construction flat, if completed within the 3-year post-transfer period (excluding the new asset), would disqualify the entire exemption.
Conclusion
Section 54F, though seemingly straightforward, involves a detailed examination of property ownership and construction timelines. In cases where:
- You hold only one existing residential property as on the date of transfer, and
- Invest the LTCG into one new residential house, and
- Do not construct or purchase any other residential house within the prohibited periods
-you can claim exemption.
However, ownership or acquisition of even one additional residential house beyond the new asset (whether by purchase or construction) within the 1- or 3-year windows would result in loss of exemption, either immediately or later under Section 54F(2).
It is therefore advisable to carefully plan and evaluate all real estate transactions, including jointly owned, under-construction, and inherited properties, before claiming Section 54F benefits.
Disclaimer: This article is intended for general awareness and informational purposes only. Readers are strongly advised to seek professional advice based on their specific facts and circumstances before making any decisions or drawing conclusions based on the contents of this article.
The author and publisher are not responsible for any loss or liability incurred by any person who relies on this content without appropriate consultation.
The views expressed herein are based on the author's personal understanding and interpretation of the applicable tax laws, which are subject to change and judicial review.
The author can also be reached at support@cabhavikchudasama.com
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