In this article we will discuss capital gains tax exemption available for an assesses by way of section 54 F, what are the conditions that need to be fulfilled to avail this exemption, the maximum amount up to which exemption available. All these points or in other words all about section 54 tax exemption shall be discussed in this article one by one so that all of your questions can be answered.
The provisions of Section 54F applies when an assessee being an individual or a Hindu Undivided Family has received a capital gain on the selling off any long term capital asset ( other than Residential House property) and in order to avail exemption the assessee has invested in Residential House property either by way of purchasing or constructing the new house property.
Conditions need to be fulfilled to get an exemption:
The assessee needs to satisfy the following basic conditions in order to get the benefit of exemption:-
- The assessee must be an Individual or Hindu Undivided Family (HUF). IF he is of any other capacity like Company, Partnership Firm, Trust, etc the benefit of exemption under this section shall not be available.
- Exemption for capital gain shall be available if the asset transferred must be a long term capital asset and that too should not be a residential house. In other words, the exemption is available only on long term capital gain arise by transfer of residential house property.
- A final condition which is the base of getting an exemption is after having long term capital gain, assessed shall invest the net consideration in house property in India. The house property in which assessed is investing must be located in India. Any investment in house property outside India shall not be eligible for exemption under section 54F.
Meaning of Investment of Net consideration:
As per the Explanation given by the Income Tax department in Section 54F, Net Consideration means the whole amount of consideration received or accrued by transferring long term capital assets after reducing any expenditure incurred wholly or exclusively on such transfer.
For example, A long term capital asset is sold for Rs. 80 Lakhs and brokerage are incurred on such transfer of Rs. 2 Lakhs, then in that case net consideration needs to invested to fulfill conditions of this section are only Rs. 78 Lakhs and not Rs. 80 Lakhs.
Manner of Investment of Net consideration:
Investment in house property can be made either of the following two ways:-
- Purchase of house property within 2 years of transfer or one year before the transfer of long term capital asset.
- Construction of new house property within 3 years of transfer of long term capital asset.
Cases where an exemption under section 54 F is not available:
There are few cases also under which assessed shall become ineligible to get exemption under this section. Following are the cases if assessee falls under any of the following conditions then the exemption shall not be available for him under section 54F:
- Other than the new residential house purchased, assesse has ownership of more than one residential house as on date of transfer of asset.
- Other than the new residential house purchased, The assessee has purchased any other residential house within a period of one year after the date of transfer of original asset.
- Other than the investment in the new house property, The assessee has constructed any new house property within a period of 3 years of the date of transfer of original asset.
Amount of exemption:
Exemption available under section 54F shall be calculated in the basis of two criteria:
Criteria 1: If the amount invested in new residential house property equals or more than the net sale consideration receives from the sale of long term capital assets, In that case, the whole amount of long term capital gain shall be exempted and not chargeable tot ax under section 45.
Criteria 2: If the amount of investment is less than the net sale consideration: In that case amount of exemption shall be calculated on the basis of so much of the capital gain as bears in proportion to the cost of a new asset to the net consideration of original asset.
Amount of exemption and capital gain not chargeable to tax under criteria 2 shall be simplified by a formula:
Amount of = Long Term Capital Gain X Amount of Investment
Exemption Net Sale Consideration
Cases under which Section 54 F exemption shall be withdrawn:
The government is providing benefits by way of section 54 F with some conditions. There is a lock-in period of three years from the date of investment of new asset (House property) either the investment is by way of purchase of a new asset or it is by way of construction of new house property.
Lock-in period of three years means the assessee getting benefit of exemption under this section can not sell the new house property acquired by getting the benefit of this section for a period of three years.
Now the question arises what will happen if the assessee has sold the newly acquired asset within 3 years. Well let me tell you the severe consequences of that, In that case, the whole of the capital gain tax amount which was exempted earlier due to that investment shall become taxable as long term capital gain in the previous year in which the new asset is transferred.
Point to be noted in this provision is that the waiver of exemption and taxability of long term capital gain to that residential house property arises in the year in which new property is sold not the original asset is transferred.
Capital Gain Deposit Account Scheme:
As we discussed earlier that assessed needs to invest in new house property within a period of 2 years in case of purchase or within a period of 3 years in case of construction of new house property, But the return needs to be filed by 31st July of the relevant assessment year. So, on what basis assessed will get the benefit of exemption in that case in such a short period of time.
In that case, there is the Capital gain deposit account scheme introduced in which assessee needs to deposit the unutilized amount by the last date of filing of return and the assessee can use that unutilized amount for purchasing or for construction of house property within a period of two or three years respectively.
However in case, assesse could not utilize the whole amount within the specified time, then the unutilized amount of capital gain shall be taxable as long term capital in the previous year in which the period of two or three years has been expired.
Synopsis of entire discussion:
From the above discussion, we can conclude the whole article in a few lines.
- An exemption was available to only Individual or HUF.
- A capital gain arises from long term capital assets other than residential houses.
- New assets acquired must be a residential house property situated in India.
- The investment must be made by purchasing of a new house within 2 years after or 1 year before of sale of asset OR Construction of new asset within 3 years.
- A capital gain exemption shall be calculated on the proportion basis to the newly acquired asset.
- An exemption shall be withdrawn in case newly acquired asset has been sold within 3 years.
- Capital gain deposit account scheme can be availed if the amount cannot be invested by the last date of filing of return.