Article explains Circumstances to be fulfilled for availing exemption under section 54F, What ‘Net Consideration’ means for Section 54F, Non-availability of exemption under section 54F, Amount of exemption available under section 54F, Circumstances under which Section 54F exemption would be withdrawn and Synopsis of the entire provisions of section 54F of the Income Tax Act.
Provisions of section 54F of the Income Tax Act provides exemption towards long term capital gain (other than a residential house) when the amount is invested in purchasing or constructing a new residential house property. The entire provisions of section 54F are explained in the present article.
The assessee needs to satisfy the following conditions in order to avail exemption under section 54F of the Income Tax Act –
1. An exemption under section 54F is available only to an individual or a Hindu Undivided Family (HUF).
2. An exemption is available towards the capital gain arisen on the transfer of any long term capital asset other than a residential house.
3. The ‘net consideration’ arisen on the transfer of long term capital asset is invested in either of the following manners –
a. The amount is invested to purchase one residential house in India. It is compulsory that such investment is made within a period of 1 year before or 2 years after the date of transfer; or
b. The amount is invested, within a period of three years, to construct one residential house in India.
The assessee is required to re-invest the ‘net consideration’, in order to avail exemption under section 54F of the Income Tax Act. The term ‘net consideration’ is defined under the Explanation to section 54F. Accordingly, net consideration means the full value of the consideration received on account of the transfer of long term capital assets reduced by any expenditure exclusively incurred in connection with the transfer.
Net consideration = Full value of consideration (-) Expenditure
The exemption under section 54F is not available under the following circumstances –
1. The assessee already owns more than one residential house on the date of transfer of the long term capital assets.
2. The assessee purchases additional residential house (other than the new residential house purchased/ constructed to claim an exemption under section 54F is claimed) within a period of one year from the date of transfer of the long term capital asset.
3. The assessee constructs additional residential house (other than the new residential house purchased/ constructed to claim an exemption under section 54F is claimed) within a period of three years from the date of transfer of the long term capital asset.
In the aforesaid three cases, the amount of capital gains arising from the transfer of the original asset, which was not charged to tax, will be deemed to be the income by way of long term capital gains of the year in which new house is transferred or another residential house (other than the new house) whose income is taxable under the head ” Income From House Property” is purchased or constructed, as the case may be.
It is important that, in the cases above, the income from the residential house (other than the one owned on the date of transfer of the long term capital asset) is chargeable under the head ‘Income from house property’.
Section 54F of the Income Tax Act provides exemption as under –
|Particulars||Amount of exemption|
|When full net consideration is invested||The full amount of long term capital gain is exempt|
|When proportionate net consideration is invested||Exemption =
Long term capital gain * Amount re-invested / Net consideration
The assessee cannot transfer the newly purchased or constructed residential house for a period of three years from the date of purchase or date of construction, as the case may be.
However, in case the assessee transfers the newly purchased/ constructed residential house, then, the capital gain exempted under section 54F would be taxable as long term capital gain in the previous year in which the residential house is transferred.
Capital Gain Deposit Account Scheme –
The provisions of section 54F allow the assessee to re-invest in any of the following manner –
1. In case of purchasing of the residential house – the assessee can invest one year before or two years after.
2. In the case of constructing a new residential house – the assessee can construct within a period of three years.
However, if the amount is not re-invested within the last date of filing of return of income. Then, the assessee is required to deposit the unutilized amount into the capital gain deposit account scheme. The unutilized amount deposited into the account can be used for purchasing or constructing the residential house within the period of two years or three years.
If the assessee fails to utilize the amount within the specified period of two or three years, then, the unutilized amount would be treated as capital gain on proportionate basis based on exemption claimed earlier as per clause (a) and clause (b) of Section 54F(1) in the previous year in which the period expires.
The gist of the above provisions are summarized hereunder –
|Nature of assessee eligible for exemption||Individual or HUF|
|Nature of capital asset transferred||Long term capital asset other than the residential house|
|Nature of re-investment||Purchased one residential house within one year before or two years after the date of transfer; or
Constructed one residential house within three years from the date of transfer.
|Withdrawal of exemption||If the purchased or constructed residential house is transferred before three years.|
|Capital Gain Deposit Account Scheme||If the amount is not re-invested by the last day of filing of the return, then, the balance amount should be deposited in the capital gain deposit account scheme.|
|1||Exemption under section 54GB of Income Tax Act 1961|
|2||Section 54GA Exemption under Income Tax Act, 1961|
|3||Capital gain exemption under section 54G of Income Tax Act, 1961|
|4||Section 54F Capital Gain Tax Exemption|
|5||Section 54EE Tax Exemption on long term capital gain|
|6||Section 54EC Exemption available on investment in certain specified bonds|
|7||Section 54D Exemption from capital gain on compulsory acquisition of land or buildings forming part of industrial undertaking|
|8||Exemption from capital gain on transfer of agricultural land – Section 54B|
|9||Exemption available under section 54 of Income Tax Act|