A residential house is a key requirement for individuals. The government of India is continuously working towards achieving the goal of “Housing for All”. The GOI has introduced various schemes for affordable housing. Similarly, various tax exemptions are also introduced to make these goals attainable. Section 54F is one of such exemptions for Long-term capital gain.
Capital Gains investment under Section 54F
An exemption under section 54F is available on the sale of a long-term capital asset except for house property if the taxpayer invests the sale consideration in the purchase or construction of a residential house property.
Eligibility to claim an exemption under Section 54F
In order to claim a capital exemption under section 54F the taxpayer shouldn’t be the owner of more than 1 house property on the date of transfer of the original asset. The taxpayer also should not purchase any other house within 2 years or construct within 3 years after the date of transfer (apart from the new asset for exemption).
The other key considerations to consider are:
- The taxpayer must be an Individual (Including NRI) or HUF.
- The asset sold is a Long-term asset other than a house property.
- The new house property has to be in India.
- There must be the transfer of Long-term capital assets other than a residential house.
Quantum of exemption under Section 54F
The amount of Exemption under Section 54F will be available as per the following criteria:
- If the cost of the new residential house ≥ Net sale consideration of the original asset
– entire capital gain is exempt.
- If the cost of the new residential house < Net sale consideration of the original asset
– only proportionate capital gain is exempt
i.e. LTCG* (Amount invested in new residential house/ Net sale consideration)
Example: Akash sold gold in FY 2022-23 for ₹ 16 crore where he has a net long-term capital gain of ₹ 12 crore. He has invested in a new residential house property for a sum of ₹8 crores. Here he can claim an exemption of ₹ 6 crore under Section 54F.
|Amount (₹ in ‘000)
|Net Sale Consideration
|Cost of New Residential House
|Exempt LTCG ( 6*(8/16)Cr.)
Consequences of Transfer of New House Property
If the new asset is transferred before the expiry of 3 years from the date of its purchase or construction then the long-term capital gain exempted earlier under section 54F would be taxable as Capital gains. The capital gain arising from the sell of new residential house property will also be charged under capital gains.
Consequences of purchase/construction of other House Property
If the taxpayer purchases any other residential house within 2 years or constructs within 3 years from the date of transfer of the original asset the long-term capital gain exempted earlier under Section 54F will be chargeable to tax in the previous year in which such residential house is purchased or constructed.
CGAS Scheme for claiming exemption under Section 54F of the Income Tax Act
Under Section 54F, the taxpayer can take benefit of the CGAS Scheme to claim the exemption. If a taxpayer is unable to utilize the whole or part of the sales consideration for the purchase or construction of a new house property till the due date of submission of ITR, then he/she should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim an exemption of the amount already spent on construction or purchase of property along with the amount deposited in CGAS.
However, it is important to note that if the taxpayer is unable to utilise the amount deposited in the Capital Gains Account Scheme within the time limit of 3 years, then it shall be taxable as income of the last year.
Net Consideration is the full Sales value/consideration received on the sale of Long Term Capital Assets reduced by any expense incurred in connection with the transfer.
Net Consideration = Sales Value – Transfer Expenses.
Yes, NRI can claim exemption u/s 54F of the Income Tax Act. Provided the LTCA sold and the house property purchased is situated in India.
Yes, the exemption can not be solely denied on the ground that new HP is purchased exclusively in the name of their spouse.