Tax Savings via Section 54F on Sale of Non-Residential Properties

Exemption u/s 54F- How to save taxes on Sale of properties other than a Residential House-

As per the Indian Income-tax Act, income arising from the sale of a capital asset is taxed under the head “Income from Capital Gains”. In the previous article we have discussed the various situations and ways to save taxes on sale of Residential Houses. In this article we will discuss the taxation on sale of properties (other than Residential Houses) and ways to save taxes by claiming exemption u/s 54F of the Income-tax Act, 1961.

Exemption u/s 54F is available to an Individual and HUF on the income arising out from the sale of the following properties:-

• Immovable Properties (Other than Residential House) such as Non- Agriculture Land, Urban Agriculture Land, Shops, Offices, Commercial premises, etc.
• Shares and Securities
• Jewellery (made of Gold, Silver, Platinum, or any other precious metal including precious and semi-precious stones, in any form)
• Archaeological Collections
• Drawings
• Paintings
• Sculptures
• Any work of Art
• Bullion

Exemption u/s 54F is available only if the properties, which is proposed to be sold are Long Term Capital Assets. The holding period for treating the property as a long-term asset is different for each property, which is briefly stated as under:-

In this article I am going to discuss the provision of taxation and ways to save taxes on sale of the above properties. Also, I am going to discuss various practical situations while selling such property and remedies for it. So, let’s start with an example for a better and simple understanding.

Mr. A purchased a plot of land in the Financial Year 2003-04 for a consideration of Rs. 10,00,000/-. He paid a stamp duty of Rs. 60,000/- and Registration charges of Rs. 30,000/- for the said purchase of land. Mr. A sold the said plot of land on 30.09.2023 for a consideration of Rs. 1 Crore.  For selling the plot, Mr. A paid brokerage of Rs. 2,00,000/-. Now the question here is what are the tax implications and ways to save the taxes on the sale of the plot of land for a consideration of Rs. 1,00,00,000/-? Since the plot was held for more than 2 years by Mr. A, the capital gains will be Long-Term Capital Gains. Let’s compute the capital gains first:-

Here it is pertinent to mention that any expenditure incurred wholly and exclusively in connection with sale of property is allowed to be reduced from the total consideration received. From the above calculation, it is evident that the sale of the plot by Mr. A for a consideration of Rs. 1,00,00,000/- yielded a Long-Term Capital Gain of  Rs. 63,20,000/-. In the case of properties other than residential houses, to save taxes, the net consideration needs to be appropriated and not only the Long Term Capital Gains as in the case of Residential house. Here the receipt of Rs. 1,00,00,000/- will result in a tax liability of Rs. 12,64,000/-. So, what is the way out to save this tax of Rs. 12,64,000/-?

54F-Invest the amount of Net Consideration in a Residential House:- Section 54F of the Income-tax Act,1961 provides an exemption from taxes arising out from the Long-Term Capital Gains on the sale of properties (other than a Residential house). The section says that if any Individual or HUF has invested the entire net consideration amount arising out from the sale of a long term capital asset into a residential house in India fulfilling the following criteria, then the taxes are exempted:-

• Have purchased a residential house within a period of one year prior to the date of sale of the property.
• Have purchased a residential house within a period of two years after the date of sale of the property.
• Have constructed a residential house within a period of three years after the date of sale of the property.

Here to save the entire Long-Term Capital Gain taxes of Rs. 12,64,000/- on the sale of plot for a consideration of Rs. 1,00,00,000/-, Mr. A has to invest the net consideration of Rs. 98,00,000/- in a residential house, subject to certain conditions, which shall be discussed in subsequent paras. If Mr. A does not want to invest the entire net consideration into a new residential house, the exemption u/s 54F will be allowed in proportion to the investment made vis-à-vis the capital gains. This aspect will also be discussed in subsequent paras with the help of examples.

Conditions to claim exemption u/s 54F:-

There are certain conditions to claim exemption u/s 54F, which are detailed as under:-

• The person should not own more than One Residential House on the date of sale of the asset other than the new house purchased within one year before the date of sale of the asset.
• The person should not purchase any other residential house other than the new asset, within two years from the date of sale of the asset.
• The person should not construct any residential house other than the new house, within three years from the date of sale of the asset.
• The persons should not sale the New House within three years from the date of it’s purchase/construction.
• The maximum amount of exemption u/s 54F is capped at Rs. 10 Cr.
• The person must file Return of Income declaring the sale of asset and claim of exemption u/s 54F.
• If the net consideration is not utilised till the date of filing of the Return of Income for the concerned year, the same should be deposited in Capital Gain Account Scheme account with any Nationalised Bank to claim exemption u/s 54F.

Let us understand the above provisions in detail:-

Have purchased a residential house within a period of one year prior to the date of sale of the asset:- Mr. A sold the plot on 30.09.2023 for a consideration of Rs.1,00,00,000/-, which resulted in Long-term capital gains of Rs. 63,20,000/-. The net consideration received was Rs. 98,00,000/-.  If Mr. A had already purchased another residential house within a period of one year before the date of sale of the plot i.e. between 01.10.2022 to 30.09.2023, the working of exemption u/s 54F are done as under:-

 Scenario 1- Cost of the new house is equal to or more than the Net Consideration:- If Mr. A had already purchased another residential house between 01.10.2022 to 30.09.2023 of a value of Rs. 98,00,000/- or more, then he is not liable to pay any tax on the sale of the plot for a consideration of Rs. 1,00,00,000/-. Let’s assume that Mr. A had purchased a flat for a total consideration of Rs. 1,20,00,000/- between 01.10.2022 to 30.09.2023, then the entire taxes of Rs. 12,64,000/- is exempted.

Scenario 2- Cost of the new house is less than the Net Consideration:- If Mr. A had purchased a residential house between 01.10.2022 to 30.09.2023 of a value of less than Rs. 98,00,000/-, then the exemption u/s 54F will be in proportion to the investment made vis-a-vis capital gains. Let’s assume that Mr. A had purchased a flat for a total consideration of Rs. 55,00,000/- between 01.10.2022 to 30.09.2023, then the calculation of exemption u/s 54F shall be as under:-

Qualifying amount of 54F:-

63,20,000/98,00,000X55,00,000=Rs. 35,46,938

So, in this scenario Rs. 35,46,938/- will be exempt u/s 54 F and Mr. A has to pay Long Term Capital Gain Tax on the difference of Total LTCG. The allowable exemption u/s 54F i.e. Rs. 63,20,000 less Rs. 35,46,938 = Rs. 27,73,062/-. In this scenario Mr. A has to pay tax @ 20% on Rs. 27,73,062/-.

Important Point: If Mr. A is claiming exemption u/s 54F on the residential house purchased between 01.10.2022 to 30.09.2023, he should not own more than one residential house, apart from this new residential house, then only the exemption u/s 54F will be allowable.

Have purchased a residential house within a period of two years after the date of sale of the plot:-  Mr. A sold the plot of land on 30.09.2023 for a consideration of Rs. 1,00,00,000/-, which resulted in Long-term capital gains of Rs. 63,20,000/-. If Mr. A wishes to purchase a residential house between 01.10.2023 to 30.09.2025, the working of exemption u/s 54F are done as under:-

 Scenario 1- Cost of the new house is equal to or more than the Net Consideration:- If Mr. A proposes to purchase a residential house between 01.10.2023 to 30.09.2025 of a value of Rs. 98,00,000/- or more, then he is not liable to pay any tax on the sale of the plot of land flat for a consideration of Rs. 1,00,00,000/-. Let’s assume that Mr. wishes to purchase a flat for a total consideration of Rs. 1,10,00,000/- between 01.10.2023 to 30.09.2025, then the entire taxes of Rs. 22,23,543/- is exempted.

Scenario 2- Cost of the new house is less than the Net Consideration:- If Mr. A wish to purchase a residential house between 01.10.2023 to 30.09.2025 of a value of less than Rs. 98,00,000/-, then the exemption u/s 54F will be in proportion to the investment made vis-a-vis capital gains. Let’s assume that Mr. A had purchased a flat for a total consideration of Rs. 75,00,000/- between 01.10.2023 to 30.09.2025, then the calculation of exemption u/s 54F shall be as under:-

Qualifying amount of 54F:-

63,20,000/98,00,000X 75,00,000=Rs. 48,36,735

So, in this scenario Rs. 48,36,735/- will be exempt u/s 54 F and Mr. A has to pay Long Term Capital Gain Tax on the difference of Total LTCG. The allowable exemption u/s 54F i.e. Rs. 63,20,000 less Rs. 48,36,735 = Rs. 14,83,265/-. In this scenario Mr. A has to pay tax @ 20% on Rs. 14,83,265/-.

Important Point: If Mr. A is claiming exemption u/s 54F on the residential house to be purchased between 01.10.2023 to 30.09.2025, he should purchase the house before filing of return of Income for A.Y. 2024-25, due date of which is 31.07.2024. If Mr. A could not buy a house before filing of return, he must deposit the unutilised net consideration in a Capital Gain Account Scheme account with any nationalised bank before filing of the return of income. The payments for acquisition of house can be made directly from this account and the acquisition of new house must be completed before 30.09.2025. Please note that this is a precondition to claim exemption u/s 54F, failing which the exemption u/s 54F will not be allowable.

Have constructed a residential house within a period of three years after the date of sale of the Plot of land:- Mr. A sold the plot of land on 30.09.2023 for a consideration of Rs. 1,00,00,000/-, which resulted in Long-term capital gains of Rs. 63,20,000/-. If Mr. A wishes to construct a residential house between 01.10.2023 to 30.09.2026, the working of exemption u/s 54F are done as under:-

 Scenario 1- Cost of the new house is equal to or more than the Net Consideration:- If Mr. A proposes to construct a residential house between 01.10.2023 to 30.09.2026 of a value of Rs. 98,00,000/- or more, then he is not liable to pay any tax on the sale of the plot of land flat for a consideration of Rs. 1,00,00,000/-. Let’s assume that Mr. wishes to construct a house for a total cost  of Rs. 1,25,00,000/- between 01.10.2023 to 30.09.2026, then the entire taxes of Rs. 22,23,543/- is exempted.

Scenario 2- Cost of the new house is less than the Net Consideration:- If Mr. A wishes to construct a residential house between 01.10.2023 to 30.09.2026 of a value of less than Rs. 98,00,000/-, then the exemption u/s 54F will be in proportion to the investment made vis-a-vis capital gains. Let’s assume that Mr. A  wishes to construct a house for a total cost of Rs. 60,00,000/- between 01.10.2023 to 30.09.2026, then the calculation of exemption u/s 54F shall be as under:-

Qualifying amount of 54F:-

63,20,000/98,00,000X 60,00,000=Rs. 38,69,388

So, in this scenario Rs. 38,69,388 will be exempt u/s 54 F and Mr. A has to pay Long Term Capital Gain Tax on the difference of Total LTCG. The allowable exemption u/s 54F i.e. Rs. 63,20,000 less Rs. 38,69,388 = Rs. 24,50,612/-. In this scenario Mr. A has to pay tax @ 20% on Rs. 24,50,612/-.

Important Point: If Mr. A is claiming exemption u/s 54F on the residential house to be constructed between 01.10.2023 to 30.09.2026, he should either complete construction before filing of return of Income for A.Y. 2024-25, due date of which is 31.07.2024. If Mr. A could not construct the house before filing of return, he must deposit the unutilised net consideration in a Capital Gain Account Scheme account with any nationalised bank before filing of return of income. The payments for construction of house can be made directly from this account and the construction of new house must be completed before 30.09.2026. Please note that this is a precondition to claim exemption u/s 54F, failing which the exemption u/s 54F will not be allowable.

I hope that the concept of claiming the exemption u/s 54F on the sale of property (Other than residential house) is clear. Now I shall proceed toward some practical situations and their remedies with the help of Questions and Answers as I get majority of question related to sale of land and gold:-

Q. I made an investment of Rs. 10 Lakh in Gold in the year 2002 at Rs. 500/- per gram. Now I wish to sell the gold. The rate per gram as of now is Rs. 6,000/-. How much will be the capital gains and how I can take the benefits of exemption u/s 54F from the income arising out from sale of gold?

Ans: First of all congratulation to you for being an ace investor. Since you  held the gold for more than 3 years, the asset is classified as Long Term Capital Asset. The Long Term Capital Gain will be worked out as under:-

Quantity of Gold   Rs. 10,00,000/Rs. 500= 2000 gms

The total taxes on the sale of gold for a total consideration comes to Rs. 17,37,000/-. To save this tax, you must buy a residential house for a minimum consideration of Rs. 1,20,00,000/- following the various conditions of Section 54F as discussed in the article.

Q. I wish to sell a plot of land for a consideration of Rs. 65,00,000/- and I also have family gold, which I want to sell for a total value of Rs. 50,00,000/-. If I purchase a house utilising these two funds, can exemption u/s 54F will be allowable?

Ans: Yes. If you are going to invest the entire net consideration out of sale of land and gold in a residential house within the time limits and conditions discussed in the article, exemption u/s 54F will be available to you and you need not pay any taxes on sale of land and gold.

Q. I am having an ancestral land in my village. I want to sell this plot of land for a total consideration of Rs. 40,00,000/-. My son lives in Bangalore and he wishes to buy a flat there for a total consideration of Rs. 1,20,00,000/-. I want to help my son by contributing Rs. 40,00,000/- to be received from sale of land. How can I save taxes on the income from sale of land?

Ans: It’s an excellent and relevant question. Since you are selling land, it attracts capital gain taxes. If you purchase the flat jointly with your son and you contribute this Rs. 40,00,000/- in the acquisition of the flat following the conditions of Section 54F as discussed in the article, you will not have to pay any taxes on sale of land and all the benefits of Section 54F s be available to you.

Q. I have purchased a flat in Delhi for a total consideration of Rs. 1,25,00,000/- in the month of May, 2023 after availing housing loan of Rs. 1,00,00,000/-. I have a plot of land in Kanpur, which I want to sell now. The expected consideration from sale of land is Rs. 85,00,000/-. I do not have any other house except the flat in Delhi. Can I repay the Housing loan after selling the plot of land? How much taxes I will have to pay on the sale of plot and whether I can get benefit of Section 54F on sale of plot in Kanpur?

Ans: You have purchased a flat in Delhi in the month of May, 2023 for a total consideration of Rs. 1,25,00,000/-. If you sell the plot of land within one year i.e. till April, 2024 for a consideration of Rs. 85,00,000/, you will not have to pay any taxes on the sale of plot of land as the investments made in the flat is greater than the sale consideration of the plot. You can utilise this Rs. 85,00,000/- as per your wish as the same will be considered as your tax paid money. But please do not forget to file your return of income and claim exemption u/s 54F in it.

Q. I am holding shares of a Pvt Ltd Co. since 2005. Now the company is being taken over by a multinational company. In lieu of shares held by me I will be getting an amount of Rs. 3 Crore. How can I save taxes on the receipt of Rs. 3 Crore?

Ans: Since you held the shares of a Pvt Ltd company for more than 2 year, the asset is Long Term Capital Asset. To save the entire taxes on the capital gain, you will have to make an investment of Rs. 2 Crore in a residential house, taking into account various conditions of Section 54F. If you wish to invest less amount in a residential house, you will get the exemption u/s 54F in proportion of investments made vis-à-vis capital gains.

Q. I got a plot of land by way of will of my Father-in-Law. I have one residential house in my name as of now. I wish to sell the plot of land for a consideration of Rs. 1.50 Crore and buy a flat in Gurgaon for a total consideration of Rs. 1.75 Crore. Since I did not incur any amount on acquisition of land, whether benefits of exemption u/s 54F will be available to me?

Ans: Yes, all benefits of exemption u/s 54F will be available to you. Since you are going the entire sale consideration to be received from sale of plot of land in a residential house and on the date of sale of land you are not having more than one house, no taxes are payable by you on the sale of land for a consideration of Rs. 1.50 Crore. Please take care of timelines discussed in the article.

Efforts have been taken to cover various aspects of claiming exemption from Long-Term Capital Gain u/s 54F on the sale of a residential house. The readers are requested to feel free to ask their questions, which I will surely respond to.

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For  professional consultation on Income-Tax provisions and tax planning while entering into any property transaction, the Author may be contacted through WhatsApp at +91 9967745680 or via email- at [email protected]