Learn how to save capital gains tax on the sale of equity shares in India under Section 54F of the Income Tax Act. Discover eligibility criteria, investment requirements, and the calculation of tax exemptions. Get expert insights for effective tax planning.
In India, under Section 54F of the Income Tax Act, individuals can save capital gains tax on the sale of equity shares if they invest the sale proceeds in a residential property. This section applies to long-term capital gains arising from the sale of any capital asset other than a residential house property.
Here’s how you can save capital gains tax under Section 54F in India-
1. Eligibility: To be eligible for the benefits of Section 54F, you must be an individual or a Hindu Undivided Family (HUF) taxpayer.
2. Nature of Asset: Section 54F applies to the sale of any capital asset, except for a residential house property. This means that if you sell equity shares and earn long-term capital gains, you can utilize this section to save tax.
3. Purchase of Residential Property: Within a specified time frame, you need to invest the net sale proceeds from the equity shares in purchasing a residential property. The timeline for investment is as follows: a. Purchase: The new residential property must be purchased either one year before the sale of shares or within two years from the date of the sale. b. Construction: If you plan to construct a residential property instead of purchasing one, the construction must be completed within three years from the date of the sale.
4. Investment Amount: The entire net sale proceeds from the equity shares need to be utilized for the purchase or construction of the residential property. If the entire amount is not invested, the remaining amount will be taxable as capital gains.
5. Lock-in Period: To avail the tax benefits under Section 54F, the residential property purchased or constructed must not be sold within three years from the date of its acquisition or completion. If the property is sold within this lock-in period, the capital gains from the sale will be taxable in the year of the sale.
6. Capital Gains Tax Exemption: If the entire net sale proceeds are invested in the residential property within the specified time frame, the amount of capital gains tax that can be exempted is calculated as follows: a. Exemption = (Amount Invested / Net Sale Consideration) * Capital Gains
Here’s an example to illustrate how Section 54F works:
Let’s say you sold equity shares and earned a long-term capital gain of INR 10 lakhs. The net sale consideration after deducting expenses related to the sale is INR 9 lakhs. Now, if you invest the entire INR 9 lakhs in purchasing a residential property within two years, you can claim an exemption under Section 54F.
Assuming the entire amount is invested, the capital gains tax exemption can be calculated as follows: Exemption = (9 lakhs / 9 lakhs) * 10 lakhs = 10 lakhs
In this case, the entire capital gains of INR 10 lakhs will be exempt from tax, effectively saving you from paying tax on the gains.
It’s important to note that the example provided is for illustrative purposes only, and the actual tax implications may vary based on the specific circumstances. It is advisable to consult with a qualified tax professional or chartered accountant for personalized advice regarding your capital gains tax liability and eligibility for exemptions under Section 54F.
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Author is A Practicing Chartered Accountant with over 5 years of rich experience in Company Law, Audits, Accounts & taxation. She is keen in streamlining business accounts of the Company and provide Business advisory services She can be connected on sweta@caswetamakwana.com or on 9819244185.
Author Bio
I have sold my residential property on 30.06.2021 of Rs.2.62 crore and bought a new residential property on 01.06.2022 of Rs.3.18 crore and claimed deduction U/s 54 of Rs.1.76 crore. Please confirm can I claim deduction U/s 54F of balance amount of Rs.3.18 crore Less 1.76 crore i.e. 1.42 in next FY 2022-23 on which sale of equity shares of Rs.50 lakh sold on 31.12.2022.