Section 54F Income Tax Capital Gains Tax Exemption for residential house

(Last Updated On: March 9, 2023)

^{Section 54F Income Tax Capital Gains Tax Exemption if investment in residential house}

This Article on Section 54F Income Tax is written by CA satbir Singh (Contact us Taxheal@gmail.com )

Summary of Section 54F Income Tax

Section 54F of Income Tax Act is Inserted by the Finance Act, 1982, w.e.f. 1-4-1983.
Exemption under Section 54F is allowed to an Individual and HUF from the long-term capital gains arising from transfer of a capital asset other than residential house property. If Capital Gains are from transfer of residential house property then you can claim exemption under Section 54 of Income Tax act Profit on sale of property used for residence.
Exemption under Section 54F of Income Tax is available if the investment is made in purchase or construction of one residential house situated in India
If the assessee
- Purchase (within a period of one year before or two years after the date of transfer ) or
- Construct (within a period of three years after the date of transfer )

a residential house then the portion of capital gains in the ratio of cost of new asset to the net consideration received on transfer is exempted.

The benefit of exemption under section 54F can be availed of even if the assessee already owns one residential house on the date of transfer of the original asset.

The benefit under section 54F would not be available :

♦		if the assessee purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset or constructs any residential house other than the new asset within a period of three years after the date of transfer of the original asset; and
♦		if the income from such residential house is chargeable under the head “Income from house property”.

Section 54F of Income Tax Act is amended many times refer Notes below on Amendment in Section 54F Income Tax.
There are certian issues like whether you can claim sections 54F and 54EC exemption at the same time i.e if the taxpayer reinvest part of proceeds to buy a new residential house and to invest the balance in specified/assets prescribed under new section 54EC ?
CBDT has extended the due date for making any investment or deposit for claiming capital gain exemptions under Section 54 to 54GB. The investment or deposit can now be made by March 31, 2023 if the original due date falls between April 1, 2021 to February 28, 2022 (both days inclusive) – Circular No. 1, dated January 6, 2023
Investment made in construction of new house before sale of original asset is also eligible for Section 54F relief: High Court

Section 54F Income Tax

Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.

54F. (1)¹[Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or ²[two years] after the date on which the transfer took place purchased, or has within a period of three years after that date ³[constructed, one residential house in India] (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—

(a)		if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45 ;
(b)		if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:

⁴[Provided that nothing contained in this sub-section shall apply where—

(a)

the assessee,—

(i)		owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii)		purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or
(iii)		constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

(b)

the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.]

Explanation.—For the purposes of this section,—

⁵[***]

⁶[***] “net consideration”, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

(2) Where the assessee purchases, within the period of ⁷[two years] after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head “Income from house property”, other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head “Capital gains” relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.

(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head “Capital gains” relating to long-term capital assets of the previous year in which such new asset is transferred.]

⁸[(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme⁹which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—

(i)

the amount by which—

(a)		the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1),
		exceeds
(b)		the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset,

		shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and
(ii)		the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid.

Explanation.—¹⁰[Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]]

Notes on Amendment in Section 54F Income Tax

1.Substituted for “Where, in the case of an assessee being an individual” by the Finance Act, 1987, w.e.f. 1-4-1988.

2. Inserted by the Finance Act, 1987, w.e.f. 1-4-1988.

3.Substituted for “constructed, a residential house” by the Finance (No. 2) Act, 2014, w.e.f. 1-4-2015.

4. Substituted by the Finance Act, 2000, w.e.f. 1-4-2001. Prior to its substitution, proviso, as inserted by the Finance Act, 1982, w.e.f. 1-4-1983, read as under :

‘Provided that nothing contained in this sub-section shall apply where the assessee owns on the date of the transfer of the original asset, or purchases, within the period of one year after such date, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head “Income from house property”, other than the new asset.’

5. Omitted by the Finance Act, 1987, w.e.f. 1-4-1988.

6 . “(ii)” omitted by the Finance Act, 1987, w.e.f. 1-4-1988.

7. Substituted for “one year” by the Finance Act, 1987, w.e.f. 1-4-1988.

8. Inserted by the Finance Act, 1987, w.e.f. 1-4-1988.

9. Govt nortified Capital Gains Accounts Scheme, 1988

10. Prior to its omission, Explanation was amended by the Finance (No. 2) Act, 1991, w.e.f. 1-4-1992.

For More Information You can visit Govt of India Income Tax website Click here

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