Quick Overview
- Brought in as a new optional tax regime with reduced slab rates.
- Relevant to individuals and to HUFs (some of these rules also extended to AOPs, BOIs, etc. by amendment).
- Mandates taxpayers to relinquish the majority of exemptions and deductions in the old regime.
- Income tax act section 115bac(1a) is the new regime, which has become the default regime.
- Under the revised regime, standard deduction and some limited deductions are permitted.
- Business individuals who receive taxpayer income should be cautious with the option, because it is limited to reversal.
- Section 115bac(6) of the Income Tax Act explains the conditions and aspects of applicability.
- Focused on simplifying the taxation process and expanding the tax base.
Section 115BAC of the Income Tax Act was introduced to offer taxpayers a new tax regime with low slab rates in lieu of other exemptions and deductions. However, with time, this provision has been modified, and today, it takes centre stage in the personal income tax structure in India.
Section 115bac of the Income Tax Act 1961 provides that individuals and Hindu Undivided Families (HUFs) are entitled to concessional tax rates, provided that they meet certain conditions. Since FY 202324, the new tax regime in section 115bac(1A) of the Income Tax Act has been the default regime of individuals except when they opt otherwise and use the old regime.
This is a crucial provision to be understood in tax planning, particularly in respect of exemptions such as capital gains under Section 54F.
What Is Section 54F of the Income Tax Act?
Income Tax Act, 1961, Section 54F gives an exemption to long-term capital gains (LTCG) that accrue on the transfer of any long-term capital asset other than residential house property, the net sale consideration is invested in either acquiring or constructing a residential house in India.
This is a popular section with taxpayers where they are able to reduce capital gains tax by reinvesting capital into residential property.
Who Can Claim Exemption Under Section 54F?
Eligible Taxpayers
The following taxpayers can claim an exemption under Section 54F:
- Individuals
- Hindu Undivided Families (HUFs)
Companies, firms, and other entities are not eligible.
Key Conditions to Claim Exemption
To claim the exemption:
- The capital asset transferred must be a long-term capital asset (other than a residential house).
- The taxpayer must invest the net sale consideration in one residential house property in India.
- The taxpayer must not own more than one residential house (other than the new house) on the date of transfer.
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Assets Eligible for Section 54F Exemption
Section 54F applies when long-term capital gains arise from the sale of:
- Land
- Commercial property
- Shares or securities
- Gold
- Any capital asset other than a residential house
The exemption is available only if the proceeds are reinvested in a residential house property in India.
Eligibility Criteria to Claim Exemption Under Section 54F
Ownership of Residential Property Conditions
On the date of transfer of the original asset:
- The taxpayer should not own more than one residential house property (other than the new house to be purchased).
- If the taxpayer purchases or constructs another residential house (other than the new one) within the specified time, the exemption may be withdrawn.
Time Limits for Purchase or Construction
The new residential house must be:
- Purchased within 1 year before or 2 years after the date of transfer; or
- Constructed within 3 years from the date of transfer.
Failure to comply with the time limits may result in loss of exemption.
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What Is Net Consideration Under Section 54F?
Net consideration refers to:
Full value of consideration received or accruing from transfer
(-) Expenditure incurred wholly and exclusively in connection with the transfer
It does not mean capital gains. Instead, it is the gross sale proceeds (after deducting transfer expenses).
How Much Capital Gains Exemption Is Available Under Section 54F?
The exemption under Section 54F depends on the proportion of net consideration invested in the new house.
- If the entire net consideration is invested, the entire capital gain is exempt.
- If only part of the net consideration is invested, the exemption is proportionate.
From recent amendments, the exemption is capped at ₹10 crore for investment in a residential house.
How to Calculate Exemption Under Section 54F
Formula for Calculating Exemption
Exemption under Section 54F is calculated as:
Exemption = Long-Term Capital Gain × (Amount Invested in New House / Net Consideration)
The remaining capital gain (if any) is taxable.
Understanding Section 54F Exemption With Examples
Scenario 1: Full Reinvestment of Net Sale Consideration
- Sale consideration: ₹1 crore
- Transfer expenses: ₹5 lakh
- Net consideration: ₹95 lakh
- Long-term capital gain: ₹40 lakh
- Investment in a new house: ₹95 lakh
Since the entire net consideration is invested, the entire LTCG of ₹40 lakh is exempt.
Scenario 2: Partial Reinvestment of Net Sale Consideration
- Net consideration: ₹95 lakh
- LTCG: ₹40 lakh
- Amount invested: ₹50 lakh
Exemption = 40,00,000 × (50,00,000 / 95,00,000)
= ₹21,05,263 (approx.)
Remaining capital gain is taxable.
Illustration Explaining Section 54F Exemption
Suppose a taxpayer sells commercial land and earns LTCG of ₹60 lakh. The net sale consideration is ₹1.2 crore. If ₹90 lakh is invested in a residential house:
Exemption = 60,00,000 × (90,00,000 / 1,20,00,000)
= ₹45 lakh
The remaining ₹15 lakh is taxable as long-term capital gains.
Capital Gains Account Scheme (CGAS) Under Section 54F
When CGAS Is Applicable
If the taxpayer is unable to invest the capital gains before filing the income tax return (due date under Section 139(1)), the unutilised amount must be deposited under the Capital Gains Account Scheme (CGAS).
Failure to deposit may result in the denial of the exemption.
How to Deposit Amount Under CGAS
- Open a CGAS account with an authorised bank.
- Deposit unutilised net consideration before the return filing due date.
- Use the amount only for the purchase or construction of residential property within the prescribed time.
Differences Between Section 54 and Section 54
Particulars |
Section 54 |
Section 54F |
Applicable Law |
Section 54 of the Income Tax Act, 1961 |
Section 54F of the Income Tax Act, 1961 |
Nature of Asset Sold |
Long-term capital asset being a residential house property (building or land appurtenant thereto) |
Any long-term capital asset other than a residential house property (e.g., land, shares, gold, commercial property) |
Eligible Taxpayers |
Individuals and Hindu Undivided Families (HUFs) |
Individuals and Hindu Undivided Families (HUFs) |
Type of Capital Gain |
Long-Term Capital Gain (LTCG) arising from the sale of a residential house |
Long-Term Capital Gain (LTCG) arising from the sale of a non-residential asset |
Investment Required for Exemption |
Only the amount of capital gain needs to be invested in a new residential property |
The entire net consideration (sale value minus transfer expenses) must be invested for full exemption |
Amount of Exemption |
Exemption is limited to the amount of capital gains invested |
Proportionate exemption if the full net consideration is not invested |
Formula for Exemption |
Lower of: (a) Capital Gain or (b) Amount Invested |
Capital Gain × (Amount Invested / Net Consideration) |
Time Limit for Purchase |
Purchase within 1 year before or 2 years after the date of transfer |
Purchase within 1 year before or 2 years after the date of transfer |
Time Limit for Construction |
Construction within 3 years from the date of transfer |
Construction within 3 years from the date of transfer |
Number of Houses That Can Be Purchased |
Investment allowed in one residential house in India (two houses allowed once in a lifetime if capital gain ≤ ₹2 crore, subject to conditions) |
Investment allowed in one residential house in India |
Ownership Restriction on Date of Transfer |
No restriction on the number of houses already owned |
The taxpayer must not own more than one residential house (other than the new one) on the date of transfer |
Restriction on Purchase of Additional House |
No such strict condition |
If the taxpayer purchases another residential house within 2 years or constructs within 3 years (other than the new house), the exemption may be withdrawn |
Holding Period of New Asset |
The new house must not be sold within 3 years; otherwise, the exemption is withdrawn |
Same condition – the new house must not be sold within 3 years |
Applicability to NRIs |
Applicable (subject to compliance with FEMA and other laws) |
Applicable (subject to compliance with FEMA and other laws) |
Cap on Exemption (Recent Amendment) |
The maximum investment eligible for exemption is capped at ₹10 crore |
The maximum investment eligible for exemption is capped at ₹10 crore |
Capital Gains Account Scheme (CGAS) |
Applicable if the amount is not utilised before the due date of filing the return |
Applicable if the amount is not utilised before the due date of filing the return |
Complexity Level |
Comparatively simpler |
More restrictive and condition-heavy |
Case Laws Related to Section 54F
ACIT New Delhi vs Mahinder Kumar Jain (ITAT Delhi, 2014)
Facts of the Case
The assessee claimed exemption under Section 54F for investment in a residential house. The tax department questioned eligibility based on ownership conditions.
Decision of the Tribunal
The ITAT held that beneficial provisions should be interpreted liberally if the taxpayer substantially complies with conditions. The exemption was allowed.
Lata Goel vs Income Tax Department (Delhi High Court)
Background of the Case
The issue revolved around whether investment in a residential property in joint names would disqualify the exemption claim.
Key Observations and Ruling
The Delhi High Court ruled that if the entire investment is made by the assessee, merely adding a joint holder does not automatically disqualify the exemption.
Common Mistakes to Avoid While Claiming Section 54F Exemption
- Not depositing the unutilised amount in CGAS before the due date.
- Owning more than one residential property at the time of transfer.
- Investing only capital gains instead of net consideration.
- Missing purchase or construction deadlines.
- Selling the new property within three years (which triggers withdrawal of the exemption).
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Key Benefits of Section 54F of the Income Tax Act
- Reduces long-term capital gains tax burden.
- Encourages investment in residential housing.
- Provides flexibility in the reinvestment timeline.
- Supports wealth creation through property acquisition.
Impact of Section 54F on Long-Term Capital Gains Tax Planning
Section 54F plays a crucial role in tax planning for individuals selling non-residential assets. By strategically reinvesting sale proceeds, taxpayers can minimise tax liability.
Under the new regime governed by Section 115BAC of the Income Tax Act, capital gains are still taxed separately at applicable rates. However, deductions and exemptions differ depending on whether a taxpayer opts for the old regime or the concessional rates under section 115bac(1a) of the Income Tax Act.
While Section 115bac(6) of the Income Tax Act outlines specific applicability conditions, exemptions like Section 54F continue to be available as they relate to capital gains computation rather than Chapter VI-A deductions.
Taxpayers must evaluate whether opting for the regime under section 115bac of the Income Tax Act 1961 aligns with their overall financial and investment strategy.
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Frequently Asked Questions (FAQs) on Section 54F
Can I claim the Section 54F exemption if I own more than one house?
No. On the date of transfer, you must not own more than one residential house (other than the new one).
Is an exemption allowed if the new property is purchased jointly?
Yes, provided the investment is made by the assessee and the conditions are satisfied.
What happens if the new property is sold within three years?
The exemption claimed earlier will be withdrawn and taxed in the year of sale.
Is Section 54F applicable to NRIs?
Yes, NRIs can claim exemption under Section 54F, subject to compliance with conditions and investment in residential property in India.
Can an exemption be claimed for an under-construction property?
Yes. Construction must be completed within three years from the date of transfer.
