Section 54F-Capital-Gain Exemption on sale of Capital Assets other than Residential House

It provides exemption to capital gains arising from transfer of long term capital assets other than a residential house property. It may be a plot of land, commercial house property, gold, share etc. but not a residential house property. When any asset (other than residential house property) is sold at a price above the cost of acquisition, it is called capital gain or if it is sold at a price less than its acquisition cost, i.e. capital loss. If any capital gain arises on sale of assets, then the seller will be liable to pay income-tax on capital gain. Capital Gain may be Long Term or Short Term.

Section 54F gives relief to a taxpayer for long term assets, if he sells assets (other than residential house) and from the sale proceeds he acquires another residential house property.

Sale Consideration - Indexed Cost of Acquisition – Indexed cost of Improvement

For Example-

Cost of Inflation Index is as under-

2013-14                220

2014-15                240

2015-16                254

2016-17                264

2017-18                272

Answer-

Mr. X sold Gold on 15.07.2017 or purchase on 25.03.2013 i.e. Long term capital gain, so cost will be Indexed as under-

Cost of Acquisition-

Cost Price / Index for the year of purchase X Index for the year of sale

Rs. 29,50,000 / 220 x 272 = 36,47,273

Sale Consideration (D): Rs. 50,00,000

Long term Capital Gain (D-C)- Rs. 50,00,000 – Rs. 36,47,273 = Rs. 13,52,727

• This exemption is available for Individual or HUF only. Thus Firms, LLP and Companies are not eligible to claim exemption under this section.
• The assets transferred should be long term capital assets, not being a residential house property.
• The Residential house should be purchased in India, not outside India.
• The assessee should acquire only one residental house property within a period of 1 year before or 2 years after the date of transfer of old house or within a period of 3 years if residential property is constructed.
• If you have not decided to buy a residential house, but do not want to lock the money in the bonds, the money should be deposited in Capital Gain Account Scheme.

Section 54F gives relief to taxpayers, who sold his assets (other than house property) after 3 years of purchase. If he arises any profit on sale of property, can claim exemption under section 54F on the following basis-

1. If the entire amount of sale consideration is invested, you can claim the full exemption benefit.
2. If the entire amount of sale consideration is not invested, you can claim the exemption proportionately and the balance is taxable under long term capital gain.

Exemption = Cost of New House x Capital gain / Sale Consideration

If the said property (against which the exemption has taken) is sold within 3 years from the date of purchase or construction or

If purchase another residential house within 2 years of sale of the original assets or

If construct a new residential house other than the new house within 3 years of the sale of the original assets. Capital gain from the sale will be taxed as long term capital gain.

Example1-

Answer-

Long term capital gain as above-    Rs. 13,52,727

Less: Exemption u/s 54F - Rs. 13,52,727 x Rs. 35,00,000 / Rs. 50,00,000 = Rs. 9,46,908

Taxable long term capital gain :     Rs. 4,05,819

Example2-

Answer-

Long term capital gain as above-     Rs. 13,52,727

Less: Exemption u/s 54F                Rs. 13,52,727

Taxable long term capital gain                  Nil

(Amount Invested Rs. 55,00,000 which is greater the amount of sale consideration, so the taxable amount is Rs. 0/-)

Example3-

Answer-

Long term capital gain as above-      Rs. 13,52,727

Less: Exemption u/s 54F-                 Rs. 0

Taxable long term capital gain;         Rs. 13,52,727

(Mr. X has not Invested any amount in purchase of new residential property till January 2021. So, the entire amount of capital gain is taxable in the financial year 2020-21.

Example4-

Answer-

Earlier availed Long term capital gain:       Rs. 9,46,908 will be reversed and taxable as long term capital gain in the financial year 2018-19

Sale Consideration (A);                            Rs. 38,00,000

Less: Cost of acquisition* (B)                   Rs. 35,00,000

Short term capital gain (A-B)                   Rs. 3,50,000

(Mr. X has sold the property within 3 years from the date of purchase. So the short term capital gain arises of Rs. 3,50,000 and capital gain earlier availed under secction 54F is now reversed and taxable as long term capital gain is taxable in the financial year 2020-21.)

Taxable as short term capital gain. For computing capital gain on transfer of new asset, cost of acquisition = (original cost of acquisition – exemption availed u/s 54)

If the asset is sold in the Previous Year, and the seller intends to, but is yet to purchase the new house property as the time limit of 2 years or 3 years has not yet expired, then the assessee is required to deposit the amount of gains in the Capital gains account scheme (in any branch of public sector, bank) before the due date for filing income tax returns.

The amount already incurred towards purchase/construction along with the amount deposited in the capital gains account scheme can be claimed as cost while claiming the deduction.

However, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the previous year in which 3 years expire (from the date of transfer of the original asset).