The existing provisions of section 54 / 54F allow the deduction of capital gains arising on the transfer of a long-term capital asset if the assessee has, during the period of one year before or two years after the date on which the transfer takes place, purchased any residential property in India or has constructed any residential property in India within three years after that date.
It has been observed that huge deductions are being claimed under these provisions by the high-net-worth assessee. Consequently, the provisions of section 54 / 54F inserted a limit of INR 10 Crore for the value of the new property purchased while calculating the deduction.
This change is proposed to be effective from 1st April 2024 and will accordingly apply to the assessment year 2024-25 and subsequent assessment years.
Illustration Eg: A founder is selling equity to VCs and having LTCG and investing the proceeds in a residential house
Old Provision
| Particulars | Situation 1 | Situation 2 | Situation 3 |
| Sale Consideration of Equity Share (A) | 20 Cr | 20 Cr | 20 Cr |
| Cost of Acquisition Shares (B) | 1 Cr | 1Cr | 1Cr |
| LTCG (‘C) = A – B | 19 Cr | 19 Cr | 19 Cr |
| Investment in New House = D | 5 Cr | 15 Cr | 20 Cr |
| Old Deduction under 54 F
E= (C x D) / A |
(19 x 5) /20 = 4.75 cr | (19 x 15)/ 20 = 14.25 Cr | (19 x 20)/20 = 19 Cr |
| Net LTCG under previous law | 14.25 Cr | 4.75 Cr | Nil |
| Tax @ 20% Our Flow | 3.05 Cr | 0.95 Cr | Nil |
New Provision
| Particulars | Situation 1 | Situation 2 | Situation 3 |
| Sale Consideration of Equity Share (A) | 20 Cr | 20 Cr | 20 Cr |
| Cost of Acquisition Shares (B) | 1 Cr | 1Cr | 1Cr |
| LTCG (‘C) = A – B | 19 Cr | 19 Cr | 19 Cr |
| Investment in New House = D | 5 Cr | 15 Cr | 20 Cr |
| Revised law Deduction u/s 54F E= (C x D* ) / A | (19 x 5)/20
=4.75 Cr |
(19 x 10) /20=9.5 Cr | 19*10/2= 9.5 Cr |
| Net LTCG as per revised Law | 14.25 Cr | 5.5 Cr | 9.5 Cr |
| Tax @ 20% Out flow | 3.05Cr | 1.1 Cr | 1.9 Cr |
*at any given point of time, D Cannot Exceed INR 10 Cr i.e. if the investment is more than 10 Cr, then for the purpose of 54 F Amount Invested will be Considered as INR 10 Cr
Therefore It is advisable for founder to sell your share before 31 March 2023 otherwise there will be tax outflow
the amount calculated as per new provision is not correct in B Column