Section 54F of the Income-tax Act, 1961 – Exemption on Capital Gains
Overview of Section 54F
Section 54F provides exemption from long-term capital gains tax when an individual or a Hindu Undivided Family (HUF) invests the net consideration arising from the transfer of a long-term capital asset (other than a residential house) into one residential house property in India, subject to prescribed conditions.
⚠️ The exemption is subject to a maximum investment limit of ₹10 crore in the new residential house.
Eligible Assessee
The exemption under Section 54F is available only to:
- Individual
- Hindu Undivided Family (HUF)
Nature of Original Asset Transferred
Conditions relating to the original asset:
- Must be a long-term capital asset
- Must not be a residential house property
Examples:- (Land or plot, Commercial property, Shares, mutual funds, bonds, Gold or other capital assets (held long-term))
If the original asset is a residential house, Section 54 applies instead of Section 54F.
Nature of New Asset
The exemption is available when the assessee purchases or constructs One Residential House located in India. Time Limit for purchase:
- Within 1 year before, or
- Within 2 years after the date of transfer
Time limit for construction:
- Within 3 years from the date of transfer
₹10 Crore Investment Limit
As per the amendment introduced by the Finance Act, 2023 (effective from Assessment Year 2024–25):
- The maximum cost of the new residential house eligible for exemption under Section 54F is ₹10 crore
- Any investment exceeding ₹10 crore is ignored for the purpose of computing exemption
Impact: Even if the assessee invests more than ₹10 crore, the exemption will be restricted to investment of ₹10 crore only.
This cap applies separately under:
- Section 54, and
- Section 54F
Ownership Conditions (Critical Restrictions)
On the date of transfer of the original asset, the assessee must not own more than one residential house, other than the new house. Further, the assessee must not purchase another residential house within 2 years after the date of transfer, or construct another residential house within 3 years after the date of transfer.
Amount of exemption
Exemption is linked to net consideration, not capital gains. Maximum investment considered is Lower of:
- Actual investment in new house, or
- ₹10 crore
Formula = Long Term Capital Gain × (Eligible investment ÷ Net consideration) where:
- Eligible investment = Cost of new house restricted to ₹10 crore
- Net consideration = Sale consideration minus transfer expenses
Full exemption when entire net consideration (up to ₹10 crore) is invested.
Capital Gains Account Scheme (CGAS)
If the net consideration is not fully utilised before the due date of filing return under Section 139(1), the unutilised amount must be deposited in the Capital Gains Account Scheme, and deposit must be made on or before the due date. Failure to comply results in loss of exemption to that extent.
Lock in Period
If the new residential house is transferred within 3 years from purchase or construction, the exemption claimed earlier becomes taxable as long-term capital gain in the year of transfer.
Some Relevant Case Law Crux:
- Exemption under 54F can’t be denied on the ground that the construction was not completed within three years after the date on which transfer took place, on account of pendency of certain finishing work like flooring, electrical fittings, fittings of door shutter, etc. (Sambandam Udaykumar (2012) (Kar HC))
- Where the SDV under section 50C has been adopted as the full value of consideration, the reinvestment made in acquireing a residential property, which is in excess of the actual net sale consideration, can be considered for the purpose of computation of exemption under section 54F, irrestpective of the source of funds for such reinvestment. (Gouli Mahadevappa (2013) (Kar HC)
Example (Including ₹10 Crore Cap)
Facts:
- Sale of long-term land asset
- Net consideration: ₹15 crore
- Long-term capital gain: ₹6 crore
- Investment in residential house: ₹12 crore
Eligible investment for exemption:
₹10 crore (cap applies)
Exemption calculation: ₹6 crore × (₹10 crore ÷ ₹15 crore) = ₹4 crore
Taxable long-term capital gain: ₹6 crore − ₹4 crore = ₹2 crore