You might have thought about selling long-term assets such as stocks, land, or jewelry to buy your own home at least once. But what about the potential capital gains tax on the sale of such assets? The good news is that if you reinvest those gains in a residential property, you can benefit from Section 54F of the Income Tax Act. This section offers a tax-saving opportunity for individuals and HUFs, allowing them to claim an exemption on long-term capital gains from the sale of such non-residential assets.
What is Section 54F?
Section 54F allows you to claim a tax exemption when you sell long-term capital assets (LTCA) such as stocks, land, or jewelry and reinvest the proceeds in buying or constructing a new residential property. To qualify for this exemption, you need to meet certain conditions:
The asset you sold must be a long-term capital asset (LTCA) other than a residential house.
On the date of sale, you should not own more than one house property.
You must purchase a new residential house either one year before or two years after selling the LTCA. If you’re constructing the house, it should be completed within three years from the sale.
The new house property should be within India.
Calculating your exemption:
Exemption = (Cost of the new asset) x (Capital Gains) / (Net Consideration)
Maximum Exemption is up to the amount of Capital Gains.
In Budget 2023, FM, Nirmala Sitharaman has announced that capital gain tax exemption is capped at Rs 10 crore under section 54F.
Let’s understand better with an example:
Sarah sold a piece of land in FY 2022-23 for Rs. 50,00,000. She had purchased the land in FY 2015-16 for Rs. 30,00,000. Sarah also bought a new residential property for Rs. 40,00,000 in FY 2022-23. Sarah wants to know if she can claim a deduction under Section 54F. The calculation will be as follows:
Index Cost of Acquisition = Cost Price * Cost of Inflation in the year of transfer / Cost of Inflation in the year when purchased.
Withdrawal of Section 54F?
- If you sell the new residential property within 3 years of buying or constructing it, the capital gain exemption you received under Section 54F will be added to your taxable income in the year you sell the new property.
- If you purchase a new residential property (except the one on which exemption is claimed) within 2 years or construct one within 3 years, the capital gain exemption you got under Section 54F will be added to your taxable income in the year you purchase the new property.
What if you don’t reinvest the sale proceeds before filing ITR?
If you can’t reinvest the money from selling your long-term asset in a new property before filing your tax return, you can deposit it into a Capital Gain Account Scheme (CGAS) before filing to claim the Section 54F exemption.
But if you don’t use that deposited money to buy or construct a new house within 3 Years, it will be considered capital gains, and you’ll have to pay tax on the same.
54F is allowed in case of LTCA other than residential property. For residential property,
exemption u/s 54 is allowed, and you can read more about it here!
Have doubts? Ask away!