Income Tax Return Filing: All those who have sold or transferred an asset and reinvested the proceeds in a new residential property can avail tax benefits under Section 54F.
Income Tax Return Filing: With the income tax return filing season on, taxpayers are searching for ways to minimize their tax liability. And with investment appreciation becoming increasingly common, it has become imperative to understand capital gains and how one can reduce their tax liability associated with it. Hence to claim exemptions and save tax, taxpayers must know the ins and outs of the Sections 54 and 54F of the Income Tax Act which deal with capital gains.
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Sections 54 and 54F: Who all are eligible to claim exemptions?
All those who have sold or transferred an asset and reinvested the proceeds in a new residential property can avail tax benefits under Section 54F. The important point to remember here is that the amount received should either be reinvested one year before the sale of the property or used to purchase property within two years of sale or used to construct one within three years of the sale.
The exemption applies to long-term capital assets that are held for over 24 months. And in case of real estate – the holding period must be 36 months or more.
Provisions of section 54 are applicable to the sale of residential property while section 54F applies to all capital assets other than residential property, such as gold, equity shares, and non-residential property.
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After sale, the amount exempted under Section 54 will be the lower of the capital gain or the investment made in the new property.
For example, if a person purchases a residential property for Rs 30 lakh and sells it for Rs 80 lakh — making a long-term capital gain of Rs 50 lakh. So, if they then purchase a new property for Rs 40 lakh, the remaining Rs 10 lakh would be taxable under the applicable capital gains tax rate.
Similarly, if they bought gold worth Rs 20 lakh and sold it for Rs 90 lakh, then their profit and the long-term capital gain would be Rs 70 lakh. And as per Section 54F, they can claim tax exemption by using the entire proceeds of the sale — Rs 90 lakh — to purchase a residential property within the specified time frame.
If they’re unable to use the proceeds towards reinvestment within the same financial year then the proceeds from the sale must be kept in a Capital Gains Account scheme to claim tax benefits.
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Rules related to residential property
An important condition for availing the exemption is that at the time of the sale of the original asset, the taxpayer should not own more than one residential house other than the new property.
In Budget 2023, the finance minister announced a deduction cap of Rs 10 crore for capital gains on investments in new residential properties.
To summarise, Section 54 focuses on long-term capital gains derived from the sale of a residential property. Whereas, Section 54F caters to long-term capital gains obtained from the sale of any asset other than a residential property. If these gains are reinvested in a new residential property, tax benefits can be claimed. And the exemption amount is determined by the lower value between the capital gains or the investment made in the new property.
It’s important to note that the exemptions on capital gains tax can be claimed by the individual taxpayer as well as the Hindu Undivided Family (HUF).
