Section 54F of the Income Tax Act deals with Capital Gain Tax Exemption from the Sale of Long Term Property (other than Residential Property). Sec 54F (1) & 54F (2) of the Income Tax Act have been discussed in the article ‘Capital gain exemption on the sale of property under sec 54F – Landmark Judgments – Part 1‘.
Let us try to understand and simplify the provisions of Sec 54F (3) & 54F (4) of the Act, with the help of Illustrations and Case-Laws.
Section 54F (3): Where the new asset is transferred within a period of three years from the date of its purchase/ construction, the amount of Capital Gain exempted under section 54F (1), shall be deemed to be income chargeable under the head “Capital Gains” of the previous year in which such new asset is transferred.
Illustration: Mr. Naresh sold a plot of land (original Asset) in June 2022 for Rs 16 crore and purchased a residential house property (new asset) in Aug 2022 (within the time prescribed under section 54F (1)). The Capital Gain of Rs 2 crore on the sale of the original Asset is exempted under Sec 54F (1).
If Mr. Naresh transferred the said new Asset in April 2023 (within three years of purchase), the Capital Gain of Rs 2 crore that was exempted under section 54(1) will be chargeable under the head “Capital Gain “in the previous year 2023-24.
Section 54F (4) – Deposit in Capital Gain Account Scheme 1988: As we know, the purchase/construction of a residential property (new asset) is a must for claiming the exemption under section 54F (1). In case, the sale consideration arising on the transfer of the original asset is not utilized (in whole or in part) for purchase or construct a new residential property, then the benefit of exemption can be availed by depositing the unutilized amount in Capital Gains Deposit Account Scheme in any branch of public sector bank, in accordance with Capital Gains Deposit Accounts Scheme, 1988.
The new house can be purchased or constructed by with-drawing the amount from the said account within the specified time limit of 2 years or 3 years, as the case may be.
Illustration: Mr. Naresh sold a plot of land (original Asset) in June 2022 for Rs 16 crore. The Capital Gain that arises from such a sale is Rs 2 Crores. In case, he is unable to purchase/ construct the residential property (new asset) on or before the due date (31 July 2023) of filing the original return under sec 139(1), he shall deposit the net consideration of Rs 16 crores in Capital Gain Account Scheme by 31st July 2023.
5 Salient Features of Section 54F (4):
(a) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset, within one year before the date on which the transfer of the original asset took place, or which is not utilized by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return in Capital Gain Account Scheme 1988.
(b) Such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139]
(c) The Income Tax return shall be accompanied by proof of such deposit (not relevant now as supporting documents are not required to be attached, for online filing of returns)
(d) For capital gain calculation on the sale of a new asset purchased/ constructed, the amount, if any, already utilized by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new as-set.
Applicability of Section 54F(4) This section attracts only to a case where the sale consideration is not utilized for the purchase/ consideration of a house. It has no application to a case where the assessee invests the sale consideration derived from transfer in purchasing/ constructing the residential house within 2 years/ 3 years of the date of transfer.
The intention of the legislature is not to retain cash but to invest in construction or purchase of the property.
Time limit: The time limit for the deposit of the unutilized portion of the net consideration/capital gain into the capital gain scheme is the due date of filing the return under section 139(1). In case, the assessee utilizes the sale consideration for the purchase/ construction of a new asset in an extended period of filing a belated return under section 139(4), the exemption under section 54F will be al-lowed.
Illustration: Mr. Naresh sold a plot of land (original Asset) in June 2022. The due dates of return filing and time limit to deposit/ utilized sale consideration are as tabulated below:
| Sl | Particulars | Due date |
| (a) | Date of transfer of original asset | 30th June 2022 |
| (b) | Assessment year | 2023-24 |
| (c ) | Due date of filing return of income u/s 139(1) | 31st July 2023 |
| (d) | Due date of filing belated return u/s 139(4) | 31st Dec 2023 |
| (e) | The time limit for deposit of the unutilized portion of the net consideration into the capital gain scheme | 31st July 2023 |
| (f) | The assessee can utilize the sale consideration (without depositing into the capital gain scheme) for the purchase/ construction of the new asset | 31st Dec 2023 |
Relevant Judgments/ Case Laws: There are a number of such cases where the assessee retained the unutilized fund and not deposited it within the due date of return filing specified in Sec 139(1). However, funds were somehow utilized for the purchase/ construction of new assets within 2 /3 years, in an extended period allowed by section 139(4) (Belated Re-turn). Exemption under Section 54F was allowed in all those cases.
8.1 Reference of such cases are – CIT v. K. Ramchandra Rao [2015] (Kar.), Fathima Bai v. ITO [2009] 32 DTR (Kar.) 243, CIT v. Jagtar Singh Chawla [2013],), Sunayana Devi v. ITO [2017] (Kol. – Trib.), R.K.P. Elayarajan v. Dy. CIT [2012] (URO) (Chennai – Trib.), P.R. Kulkarni & Sons (HUF) v. Addl. CIT [2012] (Bang.), Ashok Kapasiawala v. ITO [2015] (Ahd.), Anil Kumar Aurora v. ITO [2013] 37 CCH 221(Mum), etc.]
8.2 However, in another case, the Bombay High Court has taken a different view. It was held assessee is not entitled to the exemption in respect of payment made after the due date of filing the return of income. Also, such payments made for the purchase of assets after the date of furnishing return of income u/s.139 (1) but before the last date available to file the return of income u/s. 139(4) are required to be routed out of deposits made in the capital gains account scheme.
8.3 The assessee can keep the return pending till he utilizes the amount for enjoying the exemption u/s. 54F without de-positing the unutilized amount of net sale consideration into the capital gain scheme. He has to utilize the same before filing a return of income u/s. 139(4). Nowhere in the In-come Tax Act, it is provided that the assessee should file his return of income before the due date prescribed under Section 139(1) for claiming under Section 54F. Mrs. Esther Christopher Mascarenhas v. ITO (2011) (Mum-ITAT).
Proviso to Sec 54F (4) – Treatment of Unutilized amount in Capital gain Account: The proviso to Section 54(F) deals with the consequence of not utilizing wholly or partially the amount kept in the Capital Gain Deposit account
Statutory Provision: If the amount deposited under this sub-section is not utilized wholly or partly for the purchase or construction of the new asset within the period specified in Section 54F (1), then,
(i) the amount by which— (a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 based on the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds (b) the amount that would not have been so charged had the amount utilized by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw the unutilized amount in accordance with the scheme aforesaid.
Illustration: Continuing with the Illustration above, Mr. Naresh has deposited the sale consideration of Rs. 16 crores in a capital gain deposit account to avail of exemption under section 54F and has not utilized the whole amount for the purchase/construction of a new asset within the specified period of 2 years /3 years (June 2024/2025). The capital gain exempted under section 54F (1) on the sale of the original asset will be taxable as income of the previous year in June 2024/2025, as the case may be.
Partial utilization of deposit amount: In case Mr. Naresh has utilized 75% of the amount deposited i.e. Rs. 12 crores and has not utilized the balance 25% i.e. Rs. 4 crore within the specified time, then 25% of the capital gain exempted previously, i.e., Rs. 0.50 crores (Rs. 2 crores minus 75%)would become chargeable to tax in the year in which the time of 2 years (for acquisition) or 3 years (for construction), as the case may be, expires.
Relevant Judgments/ Case laws:
10.1 Proportionate tax on unutilized amount: The assessee had sold the immovable property and deposited the Sale proceeds of Rs 1.15 crores in the Capital Gain Account Scheme,1988, and claimed exemption under section 54F. He purchased a residential property of Rs.21.32 lakhs before the expiry of three years from the date of transfer of the original capital asset. The proportionate tax on the unutilized amount, exempted earlier on deposit in Capital Gain Account, was chargeable in the previous year in which three years expired. Professor P N Shetty(supra).
10.2 Unutilized amount in Capital Gain Ac-count Scheme cannot be charged before the expiry of the prescribed period The unutilized amount in the Capital Gain Account Scheme shall be charged as a long-term Capital Gain of the previous year in which the period of 3 years from the date of transfer of the original capital asset expires.
10.3 The taxpayer cannot arbitrarily offer the capital gain in any other assessment year: The assessee sold a property and deposit the sale proceeds in Capital Gain Account Scheme on 30.01.2012. Instead of using the fund for the purchase/ construction of a house within 3 years (by 30.01.2015), the assessee offered the capital gain tax as income in the year 2013-14 which was contrary to the provision of law. It was held that the unused balance in the capital gain deposit is taxable only on the expiry of the period within which it is to be used. (after 30.01.2015 in this case). –Anupama Nagesh v ITO (2017).
10.4 Exemption cannot be denied on a delay of deposit in Capital gain Account: The assessee invest-ed the entire amount of sale consideration of a residential house towards the construction of a new house well within a stipulated period of three years from the date of sale in compliance with section 54F(1), he could not be denied the benefit of exemption un-der section 54F merely because he deposited said amount in capital gain account with a delay of 31 days. Held by Hon’ble ITAT Delhi in the case of ITO v. Vinod Gugnani (2022.
10.5 Part of the consideration received after the filing of return: The assessee sold its property and received a part of the sale consideration after filing a re-turn of income since the entire sale consideration was immediately invested by the as-sessee for purchasing a new residential flat and said the investment was within a stipu-lated time limit, under section 54F(4) related to deposit in CGAS would not be attracted and the assessee would be eligible to claim deduction on entire sale consideration. Held by t h e Hon’ble Ahmedabad ITAT in the case of Aniruddh Rinki Gandhi v. Dy. CIT [2022]
11. Taxability of unutilized portion of the deposit in the hands of legal heir: The unutilized amount of the deposit in the Capital Gain Account Scheme is tax-free in the hands of the legal heir, in case the assessee dies before the expiry of the stipulated period. – Circular No. 743 dated 6.5.1996, 219 ITR
11.1 The legal heir/ nominee should file prescribed Form H with the Bank after taking approval from the jurisdiction assessing officer of the deceased. Form H is the prescribed form under the scheme for closing the account and getting disbursal of the balance by the nominee/ legal heir of the deceased depositor.
11.2 In case, there is no nomination, the assessee officer may require a succession certificate or a probate of the will of the de-ceased depositor or a letter of administration by virtue of Para 13 of the Capital Gain Account Scheme.
12. The taxation of Capital gain is al-ways a dynamic and complicated issue. The taxpayers take advantage of the legal deci-sions and interpret things by a plain reading of legal provisions to minimize their tax liability.
Disclaimer: The article is for educational purposes on-ly.
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Question – 1
I have claimed exemption under 54F earlier.
But on account of builders fault? Construction delayed and agreement cancelled to construct the building. Amount paid to builder is returned after 7 years with interest.Do we need to Revoke exemption claimed u/s 54F and pay tax in current year on full amt received with interest?
I have sold Debt mutual funds and transferred funds to my daughter, which were used for payment of installment for flat under construction. Can I claim exemption from capital gains on sale of debit MFs. The flat agreement is only in the name of my daughter.
I have specific queries on the applicability of Section 54F and Section 24 for the below situation.
Mr. A purchased a fully constructed apartment in March 2023 for INR 1.0 Cr. He funded this through INR 80 lakhs bank loan and INR 20 lakhs from own funds. In addition, stamp duty of INR 10 lakhs was paid from own funds.
Mr. A sold some equity mutual funds in January 2024 for a net consideration of INR 1.35 Cr. The acquisition cost was INR 60 lakhs and LTCG was INR 75 lakhs.
1) For availing Section 54F exemption, whether stamp duty can be included in the cost of residential property (i.e., cost should be INR 1.0 Cr or INR 1.1 Cr)? There is a view that tax exemption under Section 54F is not available for stamp duty and property registration costs. Instead, these costs are eligible for deduction, up to 1.5 lakhs, under Section 80C under the old tax regime. Is this right?
2) Will Section 54F exemption be applicable on the entire amount (i.e., INR 1.0 Cr or INR 1.1 Cr) or will the IT Department disallow exemption on borrowed funds? There seem to cases favoring both sides:
• In favor of the IT Dept: Milan Sharad Ruparel v ACIT (2009) 27 SOT 61 (Mum)
• In favor of assesses: Bombay Housing Corporation v Asst. CIT (2002) 81 ITD 454 (Bom). Also in Mrs. Prema P. Shah, Sanjiv P. Shah v ITO (2006) 282 ITR (AT) 211 (Mumbai)
3) If answer to Q2 is in favor of IT Dept: Is partly/fully repaying the loan now from the mutual fund sale proceeds considered an investment towards purchase of the apartment for claiming exemption?
4) Can Mr. A claim Section 24 (interest on home loan) deduction also in addition to Section 54F?
Thanks in Advance!
Krishna
query on 54F –
1. I have sold MF worth 20L with a LTCG of say 6 Lakhs.
2. Purchased residential property of say 50L
3. Took bank loan of 30 Lakh
3. Paid builder say 15L upfront amount from 20L MF amount and rest 30L through bank loan in same financial year.
4. Remaining 5L from 20L MF selling- will pay the builder next year.( Not kept in the capital gain account)
Will exception under 54F will be on the entire 6lakh capital gain or will it be in proportion to 15L, as paid only 15Lakh from actual net consideration of 20L.
The exemption under section 54F will be on entire Capital Gain of Rs 6 Lakhs.
Reference case law :- Keshav Dutt Shreedhar v DCIT(2019).
It was held that law does not require assessee to hold on to very same money in specified assets.
provisions clearly explained even for a non finance person to understand.
But it is not clear whether capital gains under section 54F are exempt if invested in capital gains bonds. please clarify. Thanks
Thank you , Sir for your humble comment.
Amount invested in Specified Bonds are exempted under Income Tax Act but it is not covered U/S 54F.
As per Section 54EC of the Act , the Capital Gain invested in specified Bonds such as NHAI, REC etc within 6 months of the sale of Capital Asset.