What is Section 54F?
Section 54F of the Income Tax Act gives taxpayers a way to save tax on long-term capital gains (LTCG) by reinvesting the sale proceeds into a residential property. It is a useful but often overlooked provision for individuals and Hindu Undivided Families (HUFs) who have sold long-term capital assets other than a residential house.
Who can claim the exemption?
- Individuals and HUFs who have made long-term capital gains from selling any capital asset other than a residential house.
- The exemption is not available to companies.
- The taxpayer must meet ownership and timing conditions described below.
How Section 54F works — key conditions
- Type of asset: The gain must arise from a long-term capital asset other than a residential house.
- Investment window: You must use the net sale consideration to buy one residential house either within one year before the date of transfer or within two years after the date of transfer. If you are building a house, you must complete construction within three years of the transfer.
- Amount of exemption: If you invest the entire net sale consideration in the new house, you can claim full exemption on the LTCG. If you invest only part of it, the exempt amount is proportionate to the amount invested.
- Ownership restriction: On the date of transfer, the taxpayer should not own more than one residential house (other than the new one to be acquired). If you own additional residential property at that date, you may not be eligible for the exemption.
- Capital Gains Account Scheme (CGAS): If you don’t invest before filing your return, you can deposit the unutilized sale proceeds in a designated account under the CGAS by the due date of the return to claim the exemption later.
- Holding period and reversal: If the new house is sold within three years of acquisition, the exemption will be revoked and the previously exempted gain becomes taxable in the year of sale.
How the exemption is calculated
Basic formula:
Exemption = Long-term capital gain × (Amount invested in new house / Net sale consideration)
If the amount invested is equal to or more than the net sale consideration, the entire capital gain is exempt. Net sale consideration usually means the full sale proceeds after deducting allowable expenses related to the transfer.
Example to illustrate
Suppose you have an indexed long-term capital gain of ₹20,00,000 from selling a non-residential asset. The sale proceeds were ₹50,00,000 and after transfer expenses the net sale consideration is ₹48,00,000. You invest ₹30,00,000 in a new residential property.
- Exemption = ₹20,00,000 × (₹30,00,000 / ₹48,00,000) ≈ ₹12,50,000
- Taxable LTCG = ₹20,00,000 − ₹12,50,000 = ₹7,50,000
This shows how partial reinvestment reduces the exempt amount proportionally.
Common pitfalls to avoid
- Missing the investment deadlines (1 year before / 2 years after for purchase, 3 years for construction).
- Owning additional residential properties on the date of transfer without meeting the exceptions.
- Failing to deposit proceeds in CGAS when you miss the investment before filing the return.
- Not keeping proper documents—sale deed, purchase deed, bank statements, CGAS receipts—needed to substantiate the claim.
- Selling the new house within three years, which will make the exemption taxable later.
Practical tips
- Plan the purchase well in advance—timelines matter. If buying takes time, consider depositing money in CGAS before filing your return.
- Maintain clear records of sale proceeds, transfer expenses and investment proofs to support the exemption claim.
- If you can’t invest the full net consideration, be aware that only a proportionate part of the gain will be exempt.
- Consult a tax advisor for complex situations—especially where multiple properties, HUFs, or timelines are involved.
Section 54F can be a powerful tool to defer or eliminate tax on long-term capital gains when used correctly. Understanding the timelines, documentation and ownership conditions will help you make the most of this provision while staying compliant.