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Section 54F of Income Tax Act : Capital Gain Exemption on sale of LTCA except house

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Hiral Vakil

Capital Gains Exemption
Long Term Capital Asset
section 54F
Last updated on July 1st, 2022

A taxpayer can claim a capital gain exemption under Section 54F of the Income Tax Act to reduce Capital Gains Tax on the sale of a Long Term Capital Asset. Section 54F exemption 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. The amount of Exemption under Section 54F will be as below:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains.

Who can claim an exemption under Section 54F of Income Tax Act?

A taxpayer can claim an exemption under Section 54F if he/she fulfills all the below conditions:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption is not available to the company, LLP, or Firm.
  2. The asset sold is a Long Term Capital Asset (LTCA) other than a house property.
  3. On the date of sale, the taxpayer does not own more than one house property.
  4. The taxpayer purchases or constructs a new residential house before 1 year or after 2 years from the sale of the long term capital asset, or
  5. In case of construction of a new house property, within 3 years from the sale of the residential house property.
  6. The new residential house should be in India.

The taxpayer can claim the capital gain exemption under Section 54F while filing ITR in that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.

What is the Amount of Exemption Available Under Section 54F of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54F will be available as per the following formula:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains.

Example: Ajay sold gold in FY 2021-22 for Rs. 15,00,000. It was purchased in FY 2016-17 for Rs. 5,00,000. And Ajay purchased his second house property for Rs. 35,00,000 in FY 2021-22. Ajay will be able to claim a deduction under Section 54F as follows:

Particulars Amount
Sales Consideration 15,00,000
Less: Index Cost of Acquisition (5,00,000*317/264) (6,00,378)
Long Term Capital Gains 8,99,622
New House Property Purchase Price 35,00,000
Section 54F Exemption Amount (35,00,000*7,77,500/15,00,000) = 18,14,167 or 7,77,500 8,99,622
Refer Index Cost from here.
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54F of the Income Tax Act.
Tip
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54F of the Income Tax Act.

What happens to Section 54F exemption if taxpayer sells the new house property?

The lock-in period of 3 years is applicable when the taxpayer claims exemption under Section 54F of income tax act. And the following situations can arise:

Situation 1: Sale of New House before 3 years

When the taxpayer sells the new house within 3 years from the date of purchase or construction.

Consequences: The exemption under Section 54F is withdrawn. And the amount of exemption availed will be reduced from the cost of the asset. And Capital Gains will be the total sales value minus the cost of the asset.

Situation 2: Sale of New House after 3 years

When the taxpayer sells the new house after 3 years from the date of purchase or construction.

Consequences: The exemption under Section 54F is not withdrawn. The taxpayer will be able to claim the index cost of acquisition while calculating capital gains tax on sale of house property sold. And capital gains will be taxed at 20%.

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CGAS Scheme for claiming exemption under Section 54F of 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 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 exemption of 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.

FAQs

What is Net Consideration u/s 54F?

Net Consideration is the full Sales value/consideration received on sale of Long Term Capital Asset reduced by any expense incurred in connection with the transfer.
Net Consideration = Sales Value – Transfer Expenses.

Can NRI Claim exemption u/s 54F?

Yes, NRI can claim exemption u/s 54F of the Income Tax Act. Provided the LTCA sold and house property purchased is situated in India.

What will be the tax rate on capital gains earned if exemption u/s 54F is not claimed?

LTCA are taxed at special rates. It depends on the type of asset sold.
Movable Asset: 20% with Indexation,
Shares/Securities: 10% u/s 112A (above Rs. 1,00,000).

Got Questions? Ask Away!

  1. Hey @TanyaChopra

    To claim Capital Gains Exemption under Section 54EC, you need to file ITR-2.

    Read more about Section 54EC here

  2. Details are as follow:

    • Commercial Plot is purchased through joint names (father and me), construction cost paid through cash.
    • Plot booked in 2019, Sale process started in 2022 [about 35% received via biana within a week ago, remaining 65% payment to be received within 2 months as per mutual agreement]
    • Plot’s Basic Sale Price = Rs. 33L; however, overall including EDC and Delayed Interest, up to Rs. 34L
    • Sale amount = Rs. 50L
    • I do not own any house, live under mother’s rental lease agreement, currently.
    • I’m a salaried employee under private company.

    My queries/confusion:

    1. Cost Inflation Index FY based on possession date (not booking date) as entry date and sale transferred (not biana date) as exit date, right?

    2. Since it is a jointly held, I did not pay anything to acquire the commercial plot but father did. Now when we sell, 50% will be to each account, what would be my LTCG?

    3. Please correct me if I’m missing something for my LTCG (>24 mo.):
      (+) Sale Consideration: Rs. 25L (half of 50L overall joint)
      (-) Transfer Expenses: Rs. 0 (constructed via cash not eligible, right?)
      (-) Indexed Cost of Acquisition: 16.5L * 317/289 = 18.1L
      (-) Indexed Cost of Improvement: ?? (what exactly is this?)
      Long-Term Capital Gain: 6.9L

    4. If possession date and sale date is 24+ months , can I save LTCG tax by just investing Rs. 6.9L in IRFC/NHAI/PFC/IRFC bond under Section 54EC?

    5. If yes, can I keep 18.1L in my bank account or invest in FD / MF? Any further suggestion?

  3. Hey @learner

    1. Indexed Cost of Acquisition is calculated as Cost of Acquisition * CII for Sale Year/ CII for Purchase Year. In your case, CII for Sale Year would be CII of the year in which you sold property. CII for Purchase Year would be CII of the year in which you got the possession of property.

    2. If you have not contributed towards the purchase consideration, you will not be treated as a co-owner for income tax purpose. Thus, the entire LTCG would be taxed in the ITR of your father as Sale Value - Transfer Expenses - Indexed Cost of Acquisition

    3. Cost of Improvement is a capital expenditure incurred by an assessee for making improvement in the property. It can be claimed as a deduction for computing capital gains. Indexed Cost of Improvement is calculated as Cost of Improvement * CII of year of sale / CII of year of improvement

    4. If the period of holding is more than 24 months, income is treated as LTCG. You can claim exemption under Section 54EC if you fulfill all the conditions as per the Section. Read more about it here

    1. With the remaining sale proceeds, if you keep them in bank account, you will earn Savings Interest, if you invest in FD, you will earn FD Interest, You can look for other investment options where you earn income and also gain tax benefit such as ELSS, PPF, NSC, etc. Read more about it here
  4. Thanks a lot @Sakshi_Shah1 for the detailed answer and @Amulya_Garg for ensuring my queries addressed.

    I do have a follow-up queries.

    1. Since the tax is under hand of my father as he only purchased the commercial plot, can I enjoy 50% of sale proceeds that is credited to my bank account without any tax? “Enjoy” in my term refer to Multi-Option-Deposit (Bank) with quarterly payout.

    2. My father has purchased another commercial plot, do you have any relevant article that explains how tax can be saved by utilizing the sale proceeds to buy another commercial plot (before or after)?

  5. Hello @learner

    1. Ideally, since your father is the owner of the property, the sale proceeds should be credited to his bank account. If the money has already been credited to your account, there are chances that the Assessing Officer i.e. AO might question the source of funds and a justification why they are not reported as income in the ITR.

    2. Capital Gains on sale of commercial plot can be exempt if the taxpayer invests in any of the following assets:

    • Section 54EC - Buying bonds of NHAI, REC, etc
    • Section 54EE - Buying units of fund notified by Central Government to finance start-ups
    • Section 54F - Buying residential house property
  6. The registration of commercial property comes under both father and my name (co-owners), which is how sale proceeds is credited to each of us, however, all the payments for purchase of property were done by father only. And my father will report the whole capital gains in his account.

    Will this below stands true in my ITR if I do not report?

    And thanks for 2nd point.

  7. Hey @learner

    Your father should report the capital gains in his ITR. You need not report the same in your ITR. However, you must hold relevant proofs of the capital gains taxed in your father’s ITR in case the AO questions source of funds in your account.

  8. The income tax department introduced a new Section 54EE of Income Tax Act with effect from 1st April 2017. Section 54EE provides for exemption from Capital Gains Tax on the sale of any long-term capital asset by investing into units of specified funds.

    A taxpayer can claim an exemption u/s 54EE if they fulfill all the below conditions:

    1. Any assessee i.e. Individual, HUF, Company, LLP, Firm, etc can claim an exemption under Section 54EE.
    2. The asset sold is any Long Term Capital Asset (LTCA).
    3. The taxpayer invests Capital Gains within 6 months from the date of transfer of the original asset.
    4. Taxpayer invests in units of funds notified by the Central Government on or before 1st April 2019 to finance startups.
    5. The investment amount can not be more than INR 50 lakhs during any financial year.
    6. The investment amount can not be more than INR 50 lakhs during the current and succeeding financial year.

    You can read more about Section 54EE here.

    Got questions? Shoot’em here.

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