Section 54F of the Income Tax Act

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Hiral Vakil

Capital Gains Exemption
Income Heads
Income Tax
section 54F

Exemption under section 54F of the Income Tax Act is available on Capital Gains on sale of any long term capital asset other than house property and invested in purchase/construction of house property. The amount of Exemption under Section 54F will be lower of:

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

Maximum Exemption is up to Capital Gains.

A taxpayer can claim this Capital Gains Exemption while filing ITR in that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 30th November 2020.

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Who can Claim an Exemption Under Section 54F of the Income Tax Act?

A taxpayer can claim exemption u/s 54F if all the below conditions are satisfied:

  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 House Property.
  3. On the date of sales, the taxpayer does not own more than one house property.
  4. A new Residential House is purchased 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. A new Residential House should be in India.

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 2019-20 for Rs. 15,00,000. It was purchased in FY 2012-13 for Rs. 5,00,000. And Ajay purchased his second house property for Rs. 35,00,000 in FY 2019-20. Ajay will be able to claim deduction under section 54F as follows:

ParticularsAmount
Sales Consideration15,00,000
Less: Index Cost of Acquisition (5,00,000*289/200)(7,22,500)
Long Term Capital Gains7,77,500
New House Property Purchase Price35,00,000
Section 54F Exemption Amount (35,00,000*7,77,500/15,00,000) = 18,14,167 or 7,77,5007,77,500
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 Exemption if New House Property is Sold?

The lock-in period of 3 years is applicable when exemption u/s 54F of the income tax act is claimed. And the following situations can arise:

Situation 1:

When a new house is sold within 3 years from the date of purchase/construction.

Consequences: The exemption u/s 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:

When a new house is sold after 3 years from the date of purchase/construction.

Consequences: The exemption u/s 54F is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains on house property sold. And capital gains will be taxed at 20%.

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What is the Capital Gains Account Scheme (CGAS)?

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase/construction of new property till the due date of submission of ITR, then it should be deposited in the Capital Gains Deposit Account Scheme. Taxpayer can claim exemption of amount already spent on construction/purchase of property along with the amount deposited in CGAS.

Keep in mind, if the amount deposited in the CGAS is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

Similar exemption u/s 54 is available when one House Property is sold and another one purchased.
Know all about how to claim exemption u/s 54 and save taxes on Capital Gain earned.
Read More
Similar exemption u/s 54 is available when one House Property is sold and another one purchased.
Know all about how to claim exemption u/s 54 and save taxes on Capital Gain earned.
Read More

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).

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