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Section 54F of the Income Tax Act

Highlights

  • Go through the exemptions available on long-term capital gains under Section 54F.
  • See the situations when the exemptions of 54F will not be applicable.
  • Explore the Rules and Terms and Conditions of this Section.

If the government is charging taxes on the income of the individuals then it has also given many exemptions and deductions to reduce the tax burden. You might be aware of the fact that you have to pay taxes on capital gains if it has aroused due to the sale of a capital asset or property. But according to the IT Act 1961, you can claim for exemption under Section 54F if the capital gain satisfies the exemption criteria. So, let’s throw some light on Section 54F of the Income Tax Act and see how you can save taxes on capital gains from selling a property or a house. You must also explore the situations when exemptions under Section 54F are not applicable.

Rules of Section 54F

The exemption under Section 54F is available when a person transfers long-term capital assets and the amount received as consideration is invested in a residential house. You can some of the terms and conditions in order to avail of the 54F exemption.

  • Section 54F exemption is only available for Hindu Undivided Families and Individuals.
  • You will get this exemption on the capital gain that arises for transferring any long-term capital assets other than the residential house.
  • The amount received after transferring the capital asset must be invested in any of the following in order to claim exemption:-
    • An individual has invested the amount to purchase one residential house in India.
    • It is compulsory that the investment has made within a period of 1year before the date of transfer or 2 years after the date of transfer.
    • The amount is invested to construct one residential house within a period of 3 years.
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Exemptions Under Section 54F of the Income Tax Act

ParticularsExemptions
When the Individual invests full net considerationThe full amount of the capital gain will be exempted.
When a proportion of net consideration is investedAmount of Exemption = Long term Capital Gain x Amount Re-invested / Net Consideration

When Exemption u/s 54F is Not Applicable

  • If the individual already owns more than one residential house on the date of transfer of the long-term capital assets then there will be no exemptions and capital gains tax will be applicable.
  • When the individual purchases additional residential houses (other than the new residential house purchased or constructed where the exemption has already been claimed) within a period of one year from the date of transfer of the long-term capital asset.
  • The individual constructs an additional residential house (other than the new residential house purchased or constructed where the exemption has already been claimed) within a period of three years from the date of transfer of the long-term capital asset.

Net Consideration

Net Consideration = Full Value of Consideration – Expenditure

The value of Net Consideration is the amount that is calculated after deducting Transfer Expenditures from the Full value of Consideration.

How Exemption Under 54F Works?

Mr. Raj has two Shops in his town and he lives in a house on rent. He sold those two shops for ₹1,00,00,000 in June 2018. He has purchased those two shops in the year 2014 for ₹50,00,000. Then, after 2 months, he purchased his own house of ₹70,00,000 from the consideration he received from two shops. What will be the exempted amount?

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Mr. Raj generated a profit of ₹50,00,000 but he hasn’t invested full consideration amount to buy a new house so the exemption in this case under Section 54F will be:-

Exemption = ₹50,00,000 x ₹70,00,000 / ₹1,00,00,000 = ₹35,00,000

Total Taxable Amount = ₹15,00,000

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