Exemption of long-term capital gain other than a residential house property- section 54F

Do you know that you can avoid income tax on sale of Long-Term Capital assets?

Income tax act deals with the tax treatment on sale of Long-term capital assets. In our previous article on Section 54, we tried to cover the provisions of section 54 and explained the section in comprehensive way for better understanding of readers. The purpose of this article is to make the taxpayers and income tax consultants understand that section 54F is also available that can save your income tax if selling assets is not a residential house.

While section 54 grants relief from tax on long term capital gain arising form sale of residential house, Section 54F grants relief from tax on long term capital gain from long term capital assets other than a residential house.

Let us understand the basic terms of income tax act and tax treatment of capital gain on long-term capital assets:

1. What is capital assets:  Capital asset is defined under section 2(14) of the income tax act 1961. Capital asset means

  1. a property held by the taxpayer whether or not connected with his business or profession.
  2. any securities held by a Foreign Institutional Investor (FII)
  3. any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof (w.e.f 01.04.2021)

But the capital assets does not include:

  1. Stock-in-trade
  2. personal effects, that is to say movable property held for personal use. However capital assets includes:
  • jewellery;
  • archaeological collections;
  • drawings;
  • paintings;
  • sculptures; or
  • any work of art.

3. agricultural land in India (with certain conditions)

4. 6 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980,

5. Special Bearer Bonds, 1991,

6. Gold Deposit Bonds

2. Who can claim exemption-

  • Only Individual or Hindu Undivided Family (HUF) can claim exemption under section 54F.
  • Exemption under section 54F is allowed to Resident and Non-resident.
  • Artificial person such as Private limited company, Limited company, Society, Association of person, Body of individual cannot claim deduction under section 54F;

3. Conditions to claim exemption:

To claim the exemption under Section 54F taxpayer needs to satisfy the following conditions:

  • The asset transferred is long-term capital assets, other than a residential house;
  • Assessee has purchased one residential house within 1 year before the date of transfer (within 2 years after the date of transfer), alternatively house can be constructed within 3 years from the date of transfer;
  • New house property should be situated in India;
  • Assessee should not own on the date of transfer of original asset more than one residential house;

4. What is the amount of exemption –

When conditions above are satisfied, capital gain is treated as under:

  • If the cost to new residential house/cost of construction is not less than the net consideration, the entire amount of capital gain arising from transfer of asset is exempt from tax.
  • If the cost to new residential house/cost of construction is less than the net consideration. The exemption from long term capital gain will be granted proportionately on the basis of investment of net consideration for purchase or construction of residential house.
Particulars   Exemption
Net consideration < Cost of new house purchased/Construction Entire amount is Exempt
Net consideration > Cost of new house purchased/Construction Cost of new house x capital gain /net consideration

5. Consequences when exemption can be withdrawn-

2 conditions have been placed where exemption under section 54F may be withdrawn.

  1. If new house is sold within 3 years from the date of its acquisitions or construction
  2. Individual purchases within a period of 2 years or construct within a period of 3 years of the transfer of original assets, a residential house, other than the new house.

If aforesaid conditions are not satisfied, the amount of capital gain exempted earlier will be chargeable to tax in the year in which new house property is sold or residential house is purchased or constructed.

Capital Gains Accounts scheme 1988:

Where the amount of net consideration is not fully utilized for the purpose of purchase of house property or construction, it shall be deposited in the capital gain accounts scheme 1988 on or before the due date of furnishing the return of income. If deposited amount is not utilized within stipulated period, then amount not so utilized, the proportionate amount shall be treated as long term capital gain of the previous year in which period above specified expires.

Key points to remember:

  1. Non-residents (NRI) are allowed to claim the exemption under section 54.
  2. Only requirement for claiming exemption under section 54F is construction of residential house. No where is specified under the law that house should not be constructed on agriculture or on other land (CIT vs Om Prakash Goyal 2012).
  3. If taxpayer has invested amount in the construction of house property within the time limit, the exemption cannot be denied on the ground that construction has not been completed (CIT vs Sardarmal Kothari 302 ITR 206).
  4. It is to be noted that exemption under this section cannot be claimed if net proceed is used to expand or renovate an existing house.
  5. If land is owned by taxpayer’s wife and taxpayer construct the property, the taxpayer with be eligible for exemption.

For any information/query/concerns related to income tax provisions, please feel free to contact us at mail@nbaoffice.com

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