How To Claim Tax Benefits Under Section 54F ?

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  • 06 Feb 2023

Don’t worry. There are provisions to help individuals and Hindu Undivided Families (HUFs) claim exemptions/benefit from the capital gain tax liability. Sections 54 and 54F of the Income Tax Act of 1961 list these provisions. Here, one can avail tax exemption by reinvesting the net consideration from the sale of a capital asset. Reinvestment should be in the purchase or construction of a residential property. You can choose either Section 54 or 54F for filing for exemption depending on the type of asset sold.

The basic difference between these two sections of the Income Tax Act is the means of capital gain. If it is from selling a house property, then the exemption falls under Section 54. For exemption under Section 54F, the capital asset sold should not be a residential one.

Section 54F Income Tax provisions explained: Section 54F of the Income Tax Act, 1961, is for tax exemption. It is applicable when the capital asset sold was not a house property. Rather it should be assets like bonds, shares, land, or gold. Also, the entire proceeds from the sale of the said asset should be for –

  1. The purchase of a new residential property one year before the sale of the asset, or,

  2. Buying a new residential house within two years of the sale of the said asset, or,

  3. Construction of a residential house within three years from the sale of the asset

You must invest the entire proceeds of the sale of the asset in a new residential property. Suppose you invest only a part of the proceeds. Then only a proportionate amount of the total value will be eligible for tax exemption. The formula to calculate this proportionate amount is:

Amount to be exempt from taxation = Capital gain x Amount invested / Net consideration.

First, let us understand what is full value consideration. It is the amount that a seller receives from the transfer of their capital assets.

Net consideration is full value consideration minus expenses arising from the transfer. Thus, the resulting amount is the net consideration.

Related: Common mistakes when filing Income Tax Returns

  1. Available only for individuals and HUFs.

  2. The capital gain was by the sale or transfer of capital assets other than a residential property.

  3. The new property should be in the name of the seller of the asset and not anyone else.

  4. The new residential property must be purchased or constructed with the net consideration

  5. Suppose the individual cannot invest the capital gain within the financial year. Then they must deposit the amount in a public sector bank.

  6. Only a single house can be purchased or constructed. You cannot use the money in parts to buy different real estate properties.

  7. At the time of the sale of the capital asset, the individual should not own more than one existing house property.

  8. If the builder of the new property fails to complete the project and handover the house to the individual within three years, the exemption will still hold good. This is because this is not a fault on the part of the individual.

  1. If the individual owns more than one property at the time of sale of the capital asset, then the exemptions are not applicable. It is applicable only if the individual had purchased the second property for claiming the exemption under Section 54F.

  2. The exemptions are not applicable when the individual buys other residential properties within a year from the date of the capital asset sale.

  3. Individuals cannot avail exemption under Section 54F if they buy property outside India.

  4. The exemptions are not applicable when the individual constructs other residential properties within a year from the date of the capital asset sale.

Related: Penalties Under the Income Tax Act

Capital Gain Deposit Account Scheme

What happens if you cannot re-invest the net considerations in whole or part by the time of filing of taxes? Then you should deposit the amount in a public sector bank under the capital gain deposit account scheme. You have to use this amount in part or whole within the stipulated time frame. Otherwise, the full net consideration will be considered as capital gains and will be taxable.

Related: Tax Planning Under MAT

Consequence On Transfer Of New Asset

What if the new asset is transferred within three years from the date of original capital gains on which the exemption was made? Then that amount is considered as capital gain and so becomes taxable once again.

Is It Possible To Claim Exemption Under Both Section 54 And 54F For The Purchase Of A Single Housing Property?

If you take them at face value, both Sections 54 and 54F are two different sections of the Income Tax Act of 1961. Yet the income tax department used to consider them mutually exclusive. That is, until a landmark judgement by the Income Tax Tribunal, Hyderabad. The body declared that an individual can claim exemptions under both Sections 54 and 54F for the purchase or construction of a single property if they fulfil all conditions.

This judgement came as a result of a petition filed by one Mr. V.R. Reddy who had sold his land and the house that was on that land. He then purchased a house property and reinvested the entire amount he received from his original sale. The tribunal deliberated that the condition of both the sections is the purchase or construction of a residential house within a definite time frame, which he did.

Further the income tax act does not mention that two separate houses should be constructed for availing exemption under both these sections. So, Mr. Reddy was able to claim exemptions under both sections for the construction of a single house.

Related: What is Luxury Tax in India?


Paying tax is always hard on the taxpayer. So, when you sell any long-term capital gains, try to see if you fulfil any provisions under Sections 54 and 54F. You do not want to miss out on any possible tax exemptions. You could end up saving a sizable chunk as a result of a few smart decisions.

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