Section 54F Of Income Tax Act

In India, investing in property and selling it later at a higher price has been one of the most opted-for investments. However, people often forget to take taxation into account when planning this kind of investment.

Section 54F of Income Tax Act provides you with tax exemption under certain terms and conditions that we will be discussing in this article.

What is Section 54F of Income Tax Act?

Before getting into the details of the act, let’s first understand what is Section 54F of Income Tax Act 1961. This section provides an exemption of income tax capital gains arising from the sale of long-term assets other than a residential property and investing the same in the purchase or construction of a residential property.

Exemption under this section is available on long-term capital gain on selling any property other than a residential property. A tax-paying citizen of India can claim for capital gain exemption while filing ITR.

Claiming the Exemption of tax under Section 54F of Income Tax Act:

Let us now take a look at who can claim the exemption under C.

A tax-paying citizen of India can claim an exemption if he/she fulfils the below-mentioned conditions:

• The taxpayer must be a HUF or an individual. No exemption is available for any company or an LLP
• The property that is sold should be a Long Term Capital Asset other than housing or residential property
• It is important to note, that the taxpayer must not own in his name more than one house or property on the day of the sale
• The taxpayer purchased a brand new residential property 1 year earlier or 2 years later from the date of selling the earlier one or the LTCA (Long Term Capital Asset)
• In case the taxpayer is investing in the construction of house property, it should be done within a tenure of 3 years of selling the earlier property
• The new property must be within the geographical boundaries of India.

Exemptions under section 54F of Income Tax Act are:

The amount of exemption available under section 54F of Income Tax Act is calculated based on a formula.

Exemption = (Cost of new asset X Capital gain) / Net consideration

In which maximum exemption is up to the limit of the capital gain

What more is required for claiming the exemption under section 54F of Income Tax Act?

• Apart from the above-mentioned requirements, there are few more things that should be kept in mind for this exemption.
• A new house must be purchased or constructed by the taxpayer to claim the exemption
• The entire sale receipt should be invested to claim the exemption
• In case the entire amount is not invested, the exemption is proportionately allowed and is calculated using this formula:

Exemption = (Cost of new asset X Capital gain) / Sale Receipts

When are exemptions not allowed under Section 54F of Income Tax Act?

A taxpayer is not allowed any exemption under section 54F Income Tax Act under the following circumstances:

• The taxpayer owns more than one house property on the date of the sale of the initial property excluding the new property.
• If the taxpayer purchases another residential house within 1 year of the sale of the initial property and purchase or construction of the new residential property.
• If the taxpayer constructs another property apart from the new property within 3 years of the sale of the initial property
• The income from the house property is chargeable under ‘Income from house property’. This house is other than the house owned by the taxpayer on the date of the sale of the initial house property.
• Income chargeable under ‘Income from house property’ of the house purchased after 2 years of the sale of the initial house property or constructed a house within 3 years of the initial property, apart from the new house.
• The taxpayer sells the newly purchased or constructed house within 3 years of purchase or construction.

Points to keep in mind for 54f income tax:

1. In case the value of the residential property that you are buying is lower than the total sale amount, then the exemption would be allowed in a proportionate manner. For the amount that remains, you would be eligible to make a reinvestment under section 54F Income Tax Act, within a time period of 6 months.
2. The property that is being purchased cannot be in anyone else’s name but only in the seller’s name.
3. In cases where the builder who was supposed to hand over the residential property to the taxpayer fails to do so in a period of 3 years, the exemption would still be allowed.
4. The exemption under section 54F Income Tax Act will be reversed if:
   1. In case the new property is sold within a period of 3 years of its construction or its purchase
   2. Another residential house is purchased within a period of 3 years of the construction/ or within 2 years of the sale of the initial property
   3. Capital gains that are received from the sale are to be taxed as long-term capital gains

Capital Gain Account Scheme

After the sale of the property, the taxpayer can deposit the sale proceeds in a Capital Gain Account until the purchase of the residential property. The amount deposited in the Capital Gain Account is not considered for taxation until 2 years if the taxpayer purchases a house or for a period of 3 years if the taxpayer constructs a house starting from the date of sale of the property.

It is to be noted that the proceedings of the sale should be deposited in the Capital Gain Account before the ultimate due date for filing the Income Tax return for the particular year.

Amendment made to section 54F of Income Tax Act:

An amendment was made in Budget 2014 to section 54F Income Tax Act according to which the exemption allowed under the section can be considered only if the amount from the sale of the property is invested in only 1 residential house in India.

To wrap it up

For most Indians investing in property and waiting for years to reap the benefits has been the safest and time-tested way of investment. Thankfully, more and more people are now becoming aware of the taxation that is involved in the sale of immovable property. Understanding the details of section 54F of Income Tax Act, will not only help you in saving on taxes but also allow you to plan your investments in a more effective way.