Section-54F

Section 54F of Income Tax

Section 54F of Income Tax

Section 54F of the Income Tax Act provides an exemption for capital gain in case of transfer of long term capital assets against investment in a residential house. The salient features for availing exemption under section 54F are detailed hereunder –

  1. The exemption under section 54F is available only to individual and HUF;
  2. The capital gain should have arisen on account of transfer of any long term capital assets other than a residential house;
  3. Net consideration arisen on account of transfer of long term capital assets should have been invested as follows –
      • Net consideration has been re-invested in the purchase of one residential house within a period of 1 year before the date of transfer or within a period of 2 years after the date of transfer; or
      • Net consideration has been re-invested in construction of one residential house in India within a period of 3 years from the date of transfer.

Meaning Of Capital Assets and Net Consideration

The definition of capital assets is provided under section 2(14) of the Income Tax Act, 1961. Capital assets, on the basis of the time period of ownership, are divided into two different categories, namely long term capital assets and short term capital assets. A gain arising from the transfer of long term capital assets is known as ‘long term capital gain’ and likewise gain arising from the transfer of short term capital assets is known as ‘short term capital gain’. On the other hand, the net consideration arising on the transfer of capital assets means the full value of the consideration received on account of transfer of the capital assets as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

Circumstances Under Which Exemption is Not Available

Following are the circumstances under which exemption is not available under section 54F of the Income Tax Act, 1961 –

  1. The assessee owns more than 1 residential house property as on the date of transfer of the original assets. However, the residential house property bought for claiming exemption under section 54F is exempted from the same.
  2. The assessee purchases additional residential house within a period of one year from the date of transfer of original asset. The new asset purchased for claiming exemption under section 54F is exempted from the same.
  3. The assessee constructs additional residential house within a period of three years from the date of transfer of original asset. The new asset constructed for claiming exemption under section 54F is exempted from the same.

Amount of Deduction

In case the full amount of net consideration is invested in the purchase/construction of a residential house, then, the full amount of long term capital gain would be exempted under section 54F. In a case where only part of the net consideration is invested in the purchase/construction of a residential house, then, only the proportionate amount of long term capital gain would be exempted under section 54F. The proportionate amount of exemption can be calculated on the basis of following formula –

Exemption under section 54F = Long term capital gain x Amount re-invested / Net consideration

Capital Gain Deposit Account Scheme

In case the net consideration is not re-invested within the last date of filing of return of income under section 139, then, the amount should be deposited in capital gain deposit account scheme. The amount so deposited in capital gain deposit account scheme should be used for purchase/construction of the residential house within the specified period. In case the amount as deposited in capital gain deposit account scheme is not utilized for wholly or partly within the specified period for purchase or construction, as the case may be, then, in such case on expiry of the period, the unutilized amount shall be treated as a capital gain.

Consequence on Transfer of New Asset

In case there is a transfer of new purchased residential house or constructed residential house before expiry of a period of 3 years of its purchase or construction, as the case may be, then, the capital gain exempted under section 54F shall be taxable as long term capital gain of the financial year in which the new asset is transferred.

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