Section 54F of Income Tax Act
Section 54F of the Income Tax Act deals with the purchase of capital assets like a plot of land, a house of property, or a bar of gold in order to form a funds source to fulfill your finance-related goals, plan your legacy, or your estate. Sometimes, in case of an emergency or any other purpose, you may require to sell these assets. The amount gained from the sale of these capital assets is called capital gains.
As per Section 54F of the Income Tax Act, 1961, the long-term capital gains earned by selling a capital asset except a house property can be exempted from tax subject to the given condition. The capital assets comprise bonds, gold, shares, and other such items. The condition prevails that the gains from the sale must be reinvested in either the purchase or the construction of a house property. If you meet this condition, the gains earned from the sale of the capital asset will be tax-free u/s 54F of the IT Act.
Section 54F of Income Tax Act – Features
- These exemptions are applicable to Hindu Undivided Families (HUFs) and Individuals.
- The capital gain that has been earned must be through the transfer of long-term capital assets except a house property.
- ‘Net Consideration’ arising from the transfer of long-term capital assets invested in the following:
- 1. ‘Net Consideration’ that is re-invested in the purchase of residential house property in a year prior to the date of transfer or within 2 years post the date of transfer.
- 2. ‘Net Consideration’ that is re-invested in the construction of one house property in India within 3 years with respect to the date of transfer.
How to Claim Exemptions Under Section 54F
- Only Hindu Undivided Families (HUFs) and Individuals can claim the exemption.
- The proceeds received from selling the eligible capital assets must be used in any of the below-mentioned ways:
1. Purchasing a new house property within one year prior to the sale.
2. Purchasing a new house property within two years after the sale.
3. Constructing a new house property within three years after the sale.
A portion of Capital Gains That is Exempted
Suppose that an investor sells assets worth Rs. 60,00,000 which includes the capital gains worth Rs. 10,00,000. He then re-invests this sum for the construction or the purchase of a house property, hence, the exempted capital gains are calculated as mentioned below:
- Scenario 1: When the entire amount of capital gains has been re-invested
In such a case, the tax on the total capital gains (here, Rs. 10,00,000) can be exempted.
- Scenario 2: When only a portion of the capital gains has been re-invested
In such a case, the computation of the exemption on the capital gains will be done on the portion of the re-invested amount. For example, if the investor has re-invested Rs. 40,00,000, the exemption amount on the capital gains will be computed as (Rs. 40,00,000/Rs. 60,00,000)*Rs. 10,00,000=Rs. 6,67,000.
