Section 54F - Exemption on Capital Gains

A capital asset can be any property owned for personal or investment purposes. The gains you make from selling these capital assets are called capital gains which are taxable, but here, section 54F of the income tax act allows tax-saving benefits on such gains.

What is section 54F?

Section 54F allows taxpayers to claim a tax exemption on long-term capital gains earned from the sale of a capital asset other than a house property, and reinvest the sale proceeds towards the purchase or construction of a new house property. The taxpayer must be an individual or a HUF.

Simply, if you make a gain from any long-term capital assets like shares, bonds, or jewelry and invest such a gain in purchasing a residential house property then the particular gain is eligible for an exemption if specified conditions are satisfied.

  • The asset sold has to be a Long Term Capital Asset (LTCA) other than a residential house property. And on the date of sale, the taxpayer does not own more than one house property.
  • A new residential house must purchase before 1 year or after 2 years from the sale of the long-term capital asset or in case of construction within 3 years from the sale of the long-term capital asset.
  • The new house property should be bought only in India.

Exemption = Cost of new asset x Capital Gains / Net Consideration
Maximum Exemption is up to Capital Gains.

In Budget 2023, NM, Nirmala Sitharaman has proposed to cap the capital gain tax exemption on investment in residential house property under sections 54 and section 54F to ₹10 crores.

This means, taxpayers who reinvest the entire amount from the sale of assets (LTCA) to purchase or construct a residential house can claim a capital gains exemption of up to 10 crores, earlier, there was no threshold limit. Applicable from FY 2022-23.

For instance, in the last filing season, there was a taxpayer who sold land in August 2021 for ₹50 crores, which was purchased by him in 2014 for ₹ 30 crores, and he wanted to purchase residential house property which costs ₹18 crores in 2023. The assessee is eligible to claim the exemption under section 54F.

The calculation of the exemption is as follows:

Taking inflation into consideration, the cost price will be adjusted, and the indexed cost of acquisition will also be taken into account.

Index Cost of Acquisition = Cost Price* Cost of Inflation in the year of transfer (FY 2021-22) / Cost of Inflation in the year when purchased (2014-15).


What is section 54F withdrawal?

There’s a lock-in period of three years after claiming an exemption under section 54, the exemption will be withdrawn if an individual purchases another house (other than the one on which the exemption is claimed).

Withdrawal of Section 54F Exemption in Case of Net Asset Transfer

The newly constructed house property or house property is transferred before the expiry of 3 years period of its construction or purchase. Then the capital gain exemption provided under Section 54F will be taxable as long-term capital gain in the year the new asset is transferred.

What if the sale proceeds from LTCA are not reinvested before filing ITR?

You can deposit such capital gains or sales proceeds from LTCA under the capital gain account scheme (CGAS), before the date of return filing to claim the exemption u/s 54F.

However, if the deposited amount is not utilized within a specific period for the construction or purchase of house property, then on the period’s expiry, the amount would be treated as capital gains and the tax will be implied on that.

Here’s a detailed article on Section 54F of Income Tax on sale of LTCA except house- Learn by Quicko.

If any queries, you can ask them out.