Section 54F of Income Tax Act: Complete Guide for Capital Gains Exemption

What is Section 54F of Income Tax Act?

At Ultra, we help you grow and protect your wealth by simplifying complex tax rules. If you’ve sold a long-term capital asset other than a residential house, Section 54F of Income Tax Act can help you save big on capital gains tax.

In this detailed guide, learn what Section 54F is, its conditions, how to claim 54F exemption, and key points to remember.

Section 54F provides exemption on long-term capital gains earned from selling any asset other than a residential house property, provided you reinvest the sale proceeds in purchasing or constructing a new residential house property within a specified time.

Simply put, if you sell land, gold, or shares (not a house) and use the proceeds to buy a residential house, you can claim exemption under Section 54F and reduce your tax liability.

Who Can Claim 54F Exemption?

To claim 54F exemption, you must meet these conditions:

• The capital gain should be from the sale of a long-term capital asset (held for more than 36 months) other than a residential house.

• You must buy a new residential house one year before or two years after the date of sale; or construct a new residential house within three years from the date of sale.

• On the date of transfer, you should not own more than one residential house other than the new house being purchased or constructed.

• You should not purchase another residential house within two years or construct another within three years, except for the new investment.

How is the Exemption Calculated under Section 54F?

The amount of exemption depends on how much of the net sale consideration you reinvest:

• If entire sale proceeds are invested in the new house, full capital gain is exempt.

• If only a part of the sale proceeds is invested, the exemption is proportional:

Exemption=Long-term capital gain×Net Sale ConsiderationAmount Invested​

Example:

If you sell a plot for ₹50 lakh with a capital gain of ₹20 lakh and reinvest ₹40 lakh in a new house:

Exemption = 20,00,000 x 40,00,000/50,00,000 = 16,00,000

So, you pay tax only on ₹4 lakh.

What Happens If Conditions Are Not Met?

If you do not invest the required amount within the specified time:

• The unutilized capital gains must be deposited in a Capital Gains Account Scheme (CGAS) before filing your ITR.

• If the amount is not used to buy/construct a new house within the period, it will be taxed as long-term capital gains in the year when the time limit expires.

Other Important Points about 54F

• The new house must be situated in India.

• You cannot claim deduction if you buy/construct a house outside India.

• If you sell the new house within 3 years of purchase/construction, the exemption claimed under 54F will be revoked and taxed as long-term capital gain in the year of sale.

Documents Required to Claim Section 54F

• Sale deed of the original asset

• Proof of purchase/construction of new house (sale deed, payment receipts, builder agreement)

• CGAS deposit proof, if applicable

• ITR with details of capital gains and exemption claimed

Benefits of Section 54F

• Reduces tax burden on capital gains

• Encourages investment in residential housing

• Flexible reinvestment window (1-3 years)

Common Mistakes to Avoid

• Not depositing unutilized amount in CGAS before ITR due date

• Buying another residential house within restricted period

• Selling the new house within 3 years

• Investing outside India

FAQs on Section 54F of Income Tax Act

1. What is Section 54F exemption?

Section 54F allows exemption on long-term capital gains if you reinvest the net consideration in a new residential house property within specified timelines.

2. Who can claim Section 54F?

Any individual or HUF who sells a long-term capital asset other than a house and reinvests in a new residential house can claim this benefit.

3. Can I invest in more than one house under 54F?

No. The exemption applies only if you invest in one residential house and do not own more than one house on the date of transfer.

4. Is CGAS mandatory under Section 54F?

Yes, if the entire capital gain is not reinvested before filing ITR, the unutilized amount must be deposited under Capital Gains Account Scheme to avail exemption.

5. Can NRIs claim Section 54F exemption?

Yes, NRIs can claim it too, provided they invest in a residential property in India and meet all other conditions.