Section 54F of Income Tax Act — Purpose, Benefits,Exemption,Provision

Section 54F of Income Tax Act — Purpose, Benefits, Exemption, Provision

Properties are often bought and sold for investment purposes, and homeowners typically make a profit when selling their properties.

As per Indian tax regulations, the profit gained from such sales is considered income, and the individual earning the income is liable to pay taxes on it.

When the seller of a residential property uses the proceeds to purchase or construct another residential property, the person can enjoy tax benefits on capital gains under Section 54F of the Income Tax Act, 1961.

What is the Purpose of Section 54F of the Income Tax Act?

When a taxpayer sells, or transfers capital assets such as jewellery, gold, shares, etc., the profit from the sale becomes subject to capital gains tax.

Any property owned by a person is considered a capital asset, whether or not it is associated with a business or profession.

Individuals can receive a tax exemption under Section 54F of the Income Tax Act 1961 on long-term capital gains from selling any capital asset other than a house property.

Hence, if one sells a capital asset and uses the profits to purchase or construct a house property, the gains obtained from the sale of the capital asset will be eligible for exemption from tax under Section 54F.

Who Qualifies for the Benefits Provided in Section 54F?

  • Only individuals or HUF (Hindu Undivided Family) can claim this benefit. Companies are not eligible for the advantages outlined in this section.
  • The property being sold by the taxpayer must be a long-term capital asset.
  • The property being sold must be a residential house, with income from it falling under the category of income from house property.
  • The new residential house property must be purchased either one year prior or two years after the sale or transfer. In the case of a new house, individuals/sellers are given an extended timeframe of three years from the transfer or sale date to complete the construction.
  • The purchased house property must be located in India.

All of these criteria must be met to avail of the deduction under Section 54F. Additionally, this exemption can only be claimed once during the individual/seller’s lifetime. If the individual does not fulfil any one of the above conditions, one cannot claim an exemption under Section 54F of the capital gain.

Amount of Capital Gain Exemption Provided Under Section 54F

Section 54F of the Income Tax Act includes a provision for a capital gains exemption, which is determined by the lower of two factors:

  • The amount of capital gains received from the sale of a residential property.
  • The investment made in acquiring or constructing a new residential property.

For instance, let’s consider the case of Mr X, who sells his house property and earns a capital gain of ₹40,00,000. He uses the sale proceeds to purchase a new house property worth ₹25,00,000. In this scenario, the Section 54F exemption available will be the lower amount, which is ₹25,00,000. The remaining balance of capital gains, which is ₹15,00,000 (₹40,00,000 – ₹25,00,000), will be subject to taxation. [Note: If the taxpayer sells or transfers the new property within three years from the date of acquisition, the deduction on capital gains will be revoked.]

Conditions that Disqualify from Exemptions Under Section 54F

There are certain conditions in which the exemptions provided by Section 54F are not available. These scenarios include:

  • An individual shall not be eligible for tax exemption under Section 54F if that person owns multiple residential houses at the time of selling/transferring the long-term asset.
  • If an individual purchases another residential house within one year from the date of transferring the long-term asset.
  • If an individual constructs an additional residential house, other than the one purchased, within three years from the date of the transfer process, to claim an exemption under Section 54F.
  • Conclusion

    In addition to the exemption provided by Section 54F, the Income Tax Act 1961 offers several other exemptions and deductions.

    These include deductions under Section 80C, Section 80D, and many more, which can help individuals save on their taxes.

    It is necessary to purchase a residential property to take advantage of the tax benefits provided under Section 54F. So, if an individual wants to reinvest their capital gain, they can check out the offerings from Piramal Realty. It is one of the top real estate companies offering a range of contemporary luxury housing for comfortable living.

    Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.

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