Capital Gain Exemption Section 54F: If you invest short-term and long-term capital gains in a new home, you may be able to claim a tax exemption. The residence can be purchased one year before the sale of your long-term asset or two years following the sale of your long-term investment.
When you sell a capital item, such as a house or a plot of land, or stocks/shares/bonds, you earn capital gains for a higher price than you paid for it. In a nutshell, it’s the profit you make on a property transaction. This profit, often known as capital gains, is taxed. The tax amount is determined by whether the property is a short-term or long-term investment.
Short-term capital gains are added to an individual’s income and taxed according to the tax bracket they fall into. Long-term capital gains (LTCG) are taxed at 20% plus a surcharge and a cess. However, if you invest the capital gains from selling a home or stocks and bonds in another home, you can claim an exemption from this tax under Sections 54 and 54F. This house can be purchased one year before the sale of your long-term asset or two years following the sale of your long-term investment.
If you use the gains from the sale to buy notified government bonds, you can avoid paying LTCG tax under Section 54EC. We shall, however, explore the circumstances surrounding Sections 54F in this article.
- What are the Purposes of Sections 54 and 54F?
- Eligible Assessee
- Eligible Capital Gain
- Condition for Exemption
- Exemption Isn’t Available In These Situations
- Amount Of Exemption
- Lock-In Period
- Case Laws
What are the Purposes of Sections 54 and 54F?
The primary goal of giving exemptions under Sections 54 and 54F is to encourage people to build or purchase homes. One of the sub-clauses in each of these sections is that if the residence purchased with capital gains is to be made or is in the process of being built, the building must be completed within three years of the purchase. This applies to both a house you’re building on a plot and a flat you’re buying that’s still being made when you buy it.
Due to this condition, many people have lost their capital gains exemption after three years and have had to pay the LTCG tax to the IRS because the house had not been built even after three years.
Eligible Assessee
Individuals and HUFs are the only ones who qualify for an exemption under this clause.
Eligible Capital Gain
Gain from the sale of a long-term capital asset that is not a residential housing property. If the property being sold is a house, the exemption is offered under Section 54 rather than this section.
Condition for Exemption
The assessee might claim an exemption under this section if he:
- purchased a residential house within one year of the transferor’s date within two years of the date of the transfer.
- Erected a residential residence within three years after the date of the transfer.
Such a residential property should be bought or built-in India (Applicable from the assessment year 2015-16)
Exemption Isn’t Available In These Situations
If the assessee is a corporation, the exemption under this section is not applicable.
- owns more than one residential house other than the new asset on the date of transfer of the original asset; or
- purchases any residential house other than the new asset within one year of the date of transfer of the original asset; or
- Within three years of the transfer of the original asset, any residential house other than the new asset is built.
If the assessee violates condition (II) or (III), the capital gain that was previously exempt becomes taxed as Capital Gains in the year in which the condition is violated.
Amount Of Exemption
The amount of exemption will be the lesser of the two options.
- The entire capital gain is exempted if the cost of the new asset is equal to or more than the net consideration obtained on the prior asset.
- Suppose the cost of the new asset is less than the net consideration received on the original asset; in that case, the exemption will be calculated as (Capital Gain*Cost of the new asset)/Net Consideration.
Expenditure incurred entirely and exclusively in connection with such transfer – Net consideration of original asset – Sale price of a capital asset.
Lock-In Period
Suppose a new residential home property is sold within three years of its acquisition or construction. In that case, the capital gain that was previously exempt will be taxable as long-term capital gains in the year the property is sold.
This clause provides the benefit of the Capital Gains Account Scheme of 1988.
Case Laws
The assessee’s wife owns a home, and the income from that home is combined in the assessee’s hands under sections 22, 27 and 64. To refuse exemption under section 54F, such property cannot be recognised as possessed by the assessee. Maya Ajwani vs CIT (2012 Chennai), CIT vs S. Krishna Kumar ITO vs (2015)
Even if the assessee purchased or built the residential house in the name of a minor son/daughter or spouse or jointly with these, an exemption under section 54F is allowed. N. Ram Kumar vs CIT (2012 Hyderabad) Kamal Wahal vs CIT (2013 Delhi)
The deduction under section 54F is available even if the house is not entirely finished but is substantially finished. Sambandam vs. CIT (2012 Karnataka)
Whether the residential house is built on agricultural or non-agricultural land, section 54F provides an exemption. Om Prakash Goyal vs CIT (2012 Jaipur)
It was decided that the assessee could not be said to be the sole owner of a joint property to deny him the benefit of section 54F, which allows him to claim ownership of multiple properties that are jointly owned by another co-owner and cannot be sold without the consent of the other co-owners. ITO 98 ITD 335 Mum V. Rasiklal N. Satra