Section 54F: Utilizing Capital Gains for New Residential Property Investments

Budget 2024 Updates: Capital Gains Taxation Amendments

Changes in the Finance Bill 2024

The Finance Bill 2024 reintroduced the option for taxpayers to claim indexation benefits on immovable property sales. Taxpayers can now choose between:

1. 12.5% tax rate without indexation
2. 20% tax rate with indexation benefits

This flexibility helps taxpayers reduce their liability by selecting the more advantageous option.

Key Points of the Amendment

• The indexation benefit is limited to land and buildings.
• Applicable only to individuals and HUFs, not to companies or firms.
• Restricted to tax computation and does not affect exemption or loss carry-forward provisions.

Revised Capital Gains Tax Rates

1. Long-Term Capital Gains (LTCG):
• Exemption threshold raised to ₹1.25 lakh annually (previously ₹1 lakh).
• LTCG tax rate on all assets set at 12.5%.
2. Short-Term Capital Gains (STCG):
• Financial asset STCG taxed at 20%.
• Non-financial asset STCG taxed at slab rates.

Overview of Section 54F

Section 54F of the Income Tax Act provides a valuable exemption on long-term capital gains earned from selling non-residential assets if the proceeds are reinvested in residential property.

Eligibility Criteria for Section 54F Exemption

Key Conditions

1. Who Can Claim: Only individuals and Hindu Undivided Families (HUFs).
2. Property Ownership: Taxpayer must not own more than one residential property (excluding the new purchase).
3. Reinvestment Timeline:
• Purchase a new house within one year before or two years after the asset sale.
• Construct a new house within three years of the sale.
4. Lock-In Period: The new property must be held for at least three years post-purchase or construction.
5. Unutilized Funds: If sale proceeds remain unutilized by the ITR filing deadline, they must be deposited in a Capital Gains Account Scheme (CGAS) to secure the exemption.

Capital Gain Account Scheme (CGAS)

CGAS allows taxpayers to park unutilized capital gains to preserve eligibility for exemptions under Sections 54 and 54F.

Example:

Mr. Arjun sold a commercial plot for ₹20 lakhs in March 2023, earning ₹8 lakhs in capital gains. Since he couldn’t reinvest the proceeds before the ITR deadline, he deposited the amount into a CGAS account, ensuring eligibility for exemption.

Calculating Exemption Under Section 54F

Example Calculation

• Net Sale Consideration: ₹70 lakhs
• Capital Gains: ₹14 lakhs
• Reinvestment Amount: ₹50 lakhs

Formula for Exemption:
(Reinvestment Amount/Net Sale Consideration) ×Capital Gains (Reinvestment Amount / Net Sale Consideration) × Capital Gains(Reinvestment Amount/ Net Sale Consideration) × Capital Gains

Exempted Amount:
(50/70) ×14=₹10lakhs (50 / 70) × 14 = ₹10 lakhs (50/70) ×14=₹10lakhs

 

Exceptions to Section 54F Exemption

1. Multiple Residential Properties: Exemption is not available if the taxpayer owns more than one house (excluding the new one).
2. Acquisition of Another Property: Buying another property within three years invalidates the exemption.
3. Non-Utilization of Funds: Failure to reinvest or deposit proceeds in a CGAS account results in taxation of the capital gains.

Section 54 vs. Section 54F

Case Study

Scenario:
Mrs. Priya sold a commercial property in 2021, earning ₹30 lakhs in capital gains. She invested ₹25 lakhs in constructing a residential house. The next year, she reinvested ₹20 lakhs from another property sale in the same construction.

Outcome:
The ITAT ruled that Mrs. Priya could claim Section 54F exemption for both transactions against the same house, provided all conditions were met.

Conclusion

Section 54F offers a significant opportunity for taxpayers to minimize their long-term capital gains tax liability through reinvestment in residential property. By adhering to the prescribed conditions—such as the timeline for reinvestment, ownership limitations, and lock-in periods—taxpayers can maximize the benefits of this provision. Recent amendments in the Finance Bill 2024, particularly the reinstatement of indexation benefits, provide further flexibility in managing tax liabilities. Proper planning and timely actions can ensure compliance and help taxpayers achieve substantial tax savings.

If you have any further questions or need assistance, feel free to reach out to us at admin@ushmaassociates.com or info@nricaservices.com, or contact us via call/WhatsApp at +91 9910075924. 

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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.