Tax Savings Under Section 54F
Section 54F of the Income Tax Act provides an exemption on long-term capital gains (LTCG) from the sale of assets other than residential property (such as shares) if the gains are reinvested in a residential house.
Eligibility:
- Applicable to individuals and Hindu Undivided Families (HUFs).
- The asset sold should be a long-term capital asset other than a residential house property (e.g., shares, bonds, gold).
- The taxpayer must purchase or construct a residential house property within the stipulated time.
Conditions:
- Purchase of Residential House: The house property must be purchased either one year before or within two years after the date of transfer of the original asset.
- Construction of Residential House: The house property must be constructed within three years from the date of transfer of the original asset.
- The taxpayer should not own more than one residential house property on the date of transfer (other than the new house being purchased or constructed).
- The new house should not be sold within three years of its purchase or construction.
Amount of Exemption:
- If the cost of the new residential house is equal to or greater than the net consideration received from the transfer of the original asset, the entire capital gain is exempt.
- If the cost of the new residential house is less than the net consideration, the exemption is proportionate to the investment made in the new house. The formula used is:
Exemption = (Cost of New House / Net Consideration) × Capital Gain
Example Calculation:
Let's say you have a long-term capital gain of ₹10,00,000 from the sale of shares and you purchase a new house worth ₹8,00,000 within the stipulated period.
The exemption under Section 54F would be calculated as:
Exemption = (₹8,00,000 / ₹10,00,000) × ₹10,00,000 = ₹8,00,000
So, ₹8,00,000 of your capital gains will be exempt from tax, and you will be liable to pay tax on the remaining ₹2,00,000.
Key Points to Note:
- If you fail to utilize the capital gains for purchasing or constructing a house before the due date for filing the income tax return, the unutilized amount should be deposited in a Capital Gains Account Scheme (CGAS) in a nationalized bank. The amount should be utilized within the specified period to avail of the exemption.
- If the new house property is sold within three years of its purchase or construction, the exemption claimed will be revoked, and the capital gains will be taxed as long-term capital gains in the year of sale.
TOP