If you have sold a property, accrued a profit, and are now wondering how to save tax on it, then Section 54F of the Income Tax Act will come to your benefit. This section can help you avoid losing your hard-earned gains to taxes, provided you know how to use it correctly.
Section 54F of the Income Tax Act furnishes a valuable exemption on long-term capital gains emanating from the sale of residential property. This rebate under Section 54F, subject to certain conditions, is a superb tax-saving scheme for taxpayers intending to reduce their tax liabilities through strategic investment. Just recently, the Income Tax Appellate Tribunal (ITAT), Delhi, held that taxpayers can exercise their option to claim multi-year exemptions in respect of under-construction properties under section 54F, thus adding to the benefits available to taxpayers under this provision. This article provides detailed information about Section 54F of the Income Tax Act, including its advantages, the conditions for exemption under Section 54F, and additional details. Avail Section 54F Exemption to lower your tax liability and file your ITR effectively with Kanakkupillai ITR experts!
Overview of Section 54F
Section 54F of the Income Tax Act, 1961, enables you to save tax on the profit (capital gain) earned from selling an asset, such as gold, land, or shares, primarily anything other than a residential house. This implies that if you sell a long-term capital asset, such as bonds, stocks, shares, or gold, and reinvest the sale proceeds in a new residential property within a given time duration, you can claim an exemption on the capital gains arising from the sale.
Its working is explained below:
- You must invest the entire wholesale amount (not just the profit) in one residential house.
- You can purchase the new house either one year before or two years after selling the old asset.
- Otherwise, you can construct the house within three years of the sale.
- You should not already own more than one house when you sell the asset.
- Furthermore, you cannot purchase or construct another house within the next several years (2 years to purchase, 3 years to build).
- If you violate any of these rules, the tax benefit is revoked, and the capital gain becomes taxable for that year.
Commencing April 1, 2024, the maximum rebate under Section 54F is capped at Rs 10 crore. The cap still exists for the Financial Year 2025-26. This restriction was introduced in the Union Budget 2023 and took effect from April 1, 2024, impacting Assessment Year 2024=25 onwards.
If you intend to invest your gains in property, this section is a smart way to lower your tax.
Meaning of “Net Consideration” Under Section 54F
To be eligible for a tax exemption on long-term capital gains from selling non-residential assets in India, you are required to reinvest the “net consideration” of the sale into a latest residential property.
Take a glance to know what “net consideration” implies:
The total amount you get for selling your assets (gold, stocks, etc.) is the “full value of consideration.”
Now, deduct any expenses you incurred exclusively for the sale, like legal charges or broker fees. The amount remaining is referred to as the “net consideration.”
You can understand this as follows: when you have received your full sale proceeds, you subtract the costs directly related to making the sale. You are required to reinvest the remaining amount in a qualifying residential property within the defined timeframe to claim the tax exemption under Section 54F.
Eligibility Criteria to Get Exemption under Section 54F
The undermentioned are the Section 54F conditions or eligibility criteria to demand exemptions under Section 54F of the Income Tax Act.
- Source of Capital Gains: The capital gain must originate from the sale of any capital asset, excluding a primary residence. This implies that the gain can emerge from selling assets like bonds, stocks, or commercial properties.
- Purchase: The latest property can be bought either one year before or two years after the sale of the original asset.
- Type of Taxpayer: The Income tax section 54F exemption is available to individuals and Hindu Undivided Families (HUFs). Other organisations, like partnerships or companies, are not eligible under this provision.
- Ownership Restriction: To be eligible for the exemption, the taxpayer must not own more than one residential property on the date of the sale, in addition to the new property being secured for the exemption.
- Investment Timeline: Taxpayers must reinvest the net sale proceeds from the original asset in a new residential property within a specified timeframe.
- Restriction on Extra Purchases: After selling the original asset, the taxpayer must not buy any other residential house within 2 years or begin construction of another property within 3 years from the date of transfer of the original asset.
- Construction: If building a new residential property, the construction must be finished within 3 years from the date of the original asset’s sale.
- Net Sale Amount Investment: The taxpayer must invest the whole net sales amount from the original asset into the purchase of the latest residential property. Partial investments may result in partial disallowance of the exemption.
How to Compute Exemption u/s 54F?
Computing the exemption under Section 54F is not too complex. It employs a simple formula based on the percentage of your sale proceeds that you spend on the purchase of a residential house.
The formula is as follows:
54F Exemption = Capital Gains x (Amount Invested in Residential Property/Net Sale Consideration)
The example below will help illustrate this:
Mr. Verma sold a plot of land to Mr. Dixit on July 9 2024, for Rs 5 crores. He had bought the property in June 2020 for Rs 50 lakhs.
In September 2025, he purchased a residential house for Rs 3 crores.
Let us see if Mr. Verma is entitled to exemption under this section:
He held the property for over 2 years, so long-term capital gain provisions apply
He sold a non-residential asset and undertook a residential investment
He does not have any other house at the time of the non-residential asset sale
He purchased the new house within 2 years of the sale date
Now that he is eligible, we calculate the capital gains:
| Particulars | Amount (Rs) |
| Sale Price | 5,00,00,000 |
| Indexed Cost of Purchase (50,00,000 x 363 ÷ 301) | 60,20,900 |
| Long-Term Capital Gain | 4,39,79,100 |
Now, let us compute the exempt portion:
Exempt Capital Gains = 4,39,79,100x(3,00,00,000/5,00,00,000)
Exempt Capital Gains = Rs 2,63,87,460
Therefore, the taxable capital gains = 4,39,79,100 – 2,63,87,460 = Rs 1,75,91,64
Bottom Line
Briefly, Section 54F of the Income Tax Act offers beneficial tax relief on the sale of residential properties so that their long-term capital gains are reinvested in fresh residential assets. This is designed to help taxpayers lower their tax burden and provide an incentive for real estate investment, stimulating demand in the market and economic activity. Recent ITAT judgments have further expanded the advantage by permitting multiple claims in certain cases. By efficiently grasping and applying Section 54, taxpayers may increase property affordability and help in city growth while deriving tax advantages.
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