INTRODUCTION
Section 54F of the Income Tax Act provides relief to taxpayers who have earned long-term capital gains on the sale of an asset (like a piece of land, trademarks, vehicles, machinery, patents, and jewelry) and have invested the profits from such sale into the purchase or construction of a new residential property. This section offers an exemption from capital gains tax to the extent of the investment made in the new property.
The purpose of Section 54F of the Income Tax Act is to provide relief to taxpayers who have earned long-term capital gains. Section 54F exempts those taxpayers from paying tax on the gains to the extent that the sale proceeds are invested in a new residential property.
ELIGIBILITY FOR EXEMPTION UNDER SECTION 54F OF INCOME TAX ACT
To be eligible for the exemption under Section 54F, the taxpayer must satisfy certain conditions.
- The sale must be of a long-term capital asset, i.e., an asset held for more than two years.
- To acquire or build a new residential property, you must use the sale proceeds.
- The specified time limit requires the purchaser or constructor to buy or build the new residential property.
- Additionally, taxpayers should not possess more than one residential property other than the new property they are acquiring or building.
It is important to note that the exemption is available only to individuals and Hindu Undivided Families (HUFs). Other entities like companies or partnerships cannot claim this exemption. Additionally, the exemption is available only in the case of LTCG and not STCG.
CALCULATION OF EXEMPTION UNDER SECTION 54F OF INCOME TAX ACT
Section 54F of the Income Tax Act provides an exemption on capital gains arising from the sale of a long-term capital asset other than a residential house if the sale proceeds are invested in a new residential property. Here’s how you can calculate the exemption under Section 54F:
- Calculate the long-term capital gains from the sale of the asset by deducting the cost of acquisition and improvement from the sale price.
- Purchase a new residential property within one year before or two years after the date of sale of the old asset.
- Construct a new residential property within three years from the date of sale. The amount of exemption under Section 54F is calculated as follows:-(a)If the cost of the new residential property is equal to or greater than the net consideration received from the sale of the old asset, the entire capital gains amount is exempt. (b)If the cost of the new residential property is lower than the net consideration received from the sale of the old asset, then one should calculate the amount of exemption as follows.
Exemption = Capital gains x (Cost of New property / Net Consideration)
DIFFERENCE BETWEEN SECTION 54 AND 54F OF INCOME TAX ACT
Section 54 and Section 54F are both sections under the Income Tax Act that provide exemptions on capital gains from the sale of Capital Asset. However, there are some key differences between the two.
Section 54 applies to LTCG arising from the sale of a residential property, whereas Section 54F applies to LTCG arising from the sale of any asset other than a residential property.
One can claim the exemption under Section 54 only by investing the sale proceeds in another residential property in India.
In contrast, investors can make an investment in a new residential property, whether in India/outside India, under Section 54F.
WHEN SECTION 54F OF INCOME TAX ACT IS NOT APPLICABLE?
Section 54F of the Income Tax Act provides an exemption on capital gains arising from the sale of an LTCG other than a residential house if the sale proceeds are invested in a new residential property. However, there are certain circumstances in which the exemption under Section 54F may not be available.
Section 54F is applicable only to long-term capital assets. Therefore, if the asset sold is a short-term capital asset, the exemption under Section 54F would not be available.
If a taxpayer owns more than one residential house, on the date of transfer, exemption u/s 54F will be unavailable. And when the asset sold is a residential house, the exemption under Section 54F would not be available. However, in such a case, the taxpayer may be eligible for exemption under Section 54 subject to the conditions specified.
ISSUES AND CHALLENGES
Non-compliance with time limits: To claim an exemption under Section 54F of the Income Tax Act, the taxpayer must invest the capital gains in a new residential property within the time limit i.e., one year before or two years after the sale of the original asset or construct a new property within three years from the date of sale. Non-compliance with these time limits can lead to disqualification from claiming the exemption.
Non-fulfillment of conditions: Section 54F of the Income Tax Act has several conditions. The following conditions must be fulfilled to claim exemption:-
(a)the property being purchased must be a residential property
and
(b)the taxpayer must not own more than one residential house on date of transfer of original asset. (This shall be excluding the new house.)
Failure to fulfill these conditions can lead to disqualification from claiming the exemption.
Verification of property documents: Before investing in a new residential property, the taxpayer must verify the property documents. Verification is essential to ensure that they are genuine and free from any encumbrances.
Calculation of capital gains: Calculating the capital gains arising from the sale of the original asset can be complex. That’s it may require the assistance of a tax expert.
CONCLUSION
Section 54F of the Income Tax Act provides a significant exemption for taxpayers who sell a long-term capital asset other than a residential property and invest the proceeds in a new residential property. To claim the exemption, taxpayers must comply with various conditions as mentioned below:-
- the time limit for investment and
- the eligibility of the new property.
Overall, Section 54F of the Income Tax Act remains an important provision for taxpayers. It helps in minimizing their tax liability on capital gains and helps secure funds for investing in new residential property.
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