Section 54F of Income Tax Act for AY 2021-22: Understanding Exemption on Long-Term Capital Gains from Sale of Assets

Section 54F of the Income Tax Act, 1961 provides an exemption on capital gains arising from the sale of a long-term asset, if the proceeds are invested in a residential property. This section applies to individuals and Hindu Undivided Families (HUFs) and is applicable for the assessment year 2021-22. In this blog, we will discuss the provisions of Section 54F in detail.

Introduction to Section 54F:

Section 54F is a provision that provides relief to taxpayers who have sold a long-term asset and invested the proceeds in a residential property. The exemption under this section is available only to individuals and HUFs. The objective of this section is to encourage investment in residential property and to provide relief to taxpayers from the burden of capital gains tax.

Eligibility criteria for claiming exemption under Section 54F:

To claim exemption under Section 54F, the taxpayer must fulfill the following conditions:

1. The taxpayer must be an individual or HUF.
2. The asset sold must be a long-term capital asset.
3. The proceeds from the sale of the asset must be invested in a residential property.
4. The residential property must be purchased within one year before or two years after the sale of the asset.
5. The residential property must be located in India.
6. The taxpayer must not own more than one residential property, other than the new property, on the date of transfer of the original asset.

Amount of exemption:

The amount of exemption under Section 54F is calculated based on the investment made in the residential property. The exemption is equal to the lower of the following two amounts:

1. The amount of capital gains arising from the sale of the long-term asset.
2. The amount invested in the new residential property.

If the amount invested in the new residential property is less than the capital gains, then the exemption will be limited to the amount invested in the new property.

Procedure for claiming exemption under Section 54F:

To claim exemption under Section 54F, the taxpayer must follow the following procedure:

1. Calculate the amount of capital gains arising from the sale of the long-term asset.
2. Purchase a new residential property within one year before or two years after the sale of the asset.
3. Invest the entire amount of the capital gains in the new residential property.
4. File the income tax return for the relevant assessment year.
5. Claim exemption under Section 54F in the income tax return.

Benefits of Section 54F:

1. Reduction in tax liability: Section 54F provides a significant reduction in the tax liability of taxpayers. The amount of capital gains tax that would have been payable by the taxpayer is exempted if the proceeds from the sale of the asset are invested in a residential property.
2. Encourages investment in residential property: Section 54F encourages investment in residential property by providing an exemption on capital gains tax. This, in turn, boosts the real estate sector and increases the availability of affordable housing.
3. No restriction on location of the residential property: The residential property can be purchased anywhere in India to claim exemption under Section 54F. This provides flexibility to the taxpayers to invest in a property that suits their requirements.
4. No limit on the amount of investment: There is no limit on the amount of investment that can be made in the residential property to claim exemption under Section 54F. The entire amount of capital gains can be invested in the new residential property.
5. Can be claimed multiple times: Section 54F can be claimed multiple times, provided all the conditions mentioned in the section are fulfilled. This means that the taxpayer can sell a long-term asset and invest the proceeds in a residential property multiple times during their lifetime.

Important points to keep in mind:

1. The exemption under Section 54F is available only to individuals and HUFs. Other entities like companies and partnership firms are not eligible for this exemption.
2. The asset sold must be a long-term capital asset. This means that the asset must have been held for more than two years before it was sold.
3. The residential property must be purchased within one year before or two years after the sale of the asset. If the taxpayer constructs a new residential property, it must be completed within three years from the date of transfer of the original asset.
4. The taxpayer must not own more than one residential property, other than the new property, on the date of transfer of the original asset. If the taxpayer owns more than one residential property, they will not be eligible to claim exemption under Section 54F.

Additional points to keep in mind:

1. In case the entire amount of capital gains is not invested in the new residential property before the due date of filing the income tax return, the remaining amount will be taxed as long-term capital gains in the year in which the due date falls.
2. If the taxpayer sells the new residential property within three years from the date of purchase, the exemption claimed earlier will be reversed and the amount of capital gains exempted earlier will be taxable in the year of sale.
3. The residential property purchased under Section 54F cannot be sold for a period of three years from the date of purchase. If the property is sold before the completion of three years, the exemption claimed earlier will be reversed and the amount of capital gains exempted earlier will be taxable in the year of sale.

Conclusion:

Section 54F is a beneficial provision for taxpayers who have sold a long-term asset and invested the proceeds in a residential property. The exemption provided under this section can help taxpayers save a significant amount of tax. However, it is important to ensure that all the conditions mentioned in the section are fulfilled to claim the exemption. It is always advisable to consult a tax expert or a chartered accountant before taking any decision related to tax planning.

Read more useful content:

• section 145 of income tax act
• section 10e of income tax act
• section 9 of the income tax act
• section 94b of income tax act
• section 206aa of income tax act

Frequently Asked Questions (FAQs)

1. Who is eligible to claim exemption under Section 54F?

Individuals and HUFs (Hindu Undivided Families) are eligible to claim exemption under Section 54F of the Income Tax Act.

2. What types of assets can be sold to claim exemption under Section 54F?
Only long-term capital assets, such as property, stocks, or bonds, can be sold to claim exemption under Section 54F.

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3. Can I claim exemption under Section 54F if I already own a residential property?
No, if you own more than one residential property (other than the new property), you cannot claim exemption under Section 54F.

4. Is there a limit on the amount of investment in the new residential property to claim exemption under Section 54F?
No, there is no limit on the amount of investment in the new residential property to claim exemption under Section 54F.

5. What is the time limit for purchasing or constructing the new residential property?
The new residential property must be purchased within one year before or two years after the sale of the original asset. If the taxpayer constructs a new residential property, it must be completed within three years from the date of transfer of the original asset.

6. Can I claim exemption under Section 54F if I sell a property held for less than two years?
No, only long-term capital assets held for more than two years can be sold to claim exemption under Section 54F.

7. Can I claim exemption under Section 54F if I purchase a commercial property instead of a residential property?
No, only investment in a residential property can be claimed for exemption under Section 54F.

8. Can I claim exemption under Section 54F for a property located outside India?
No, the new residential property must be purchased in India to claim exemption under Section 54F.

9. Can I claim exemption under Section 54F if I invest the capital gains in a property jointly with someone else?
Yes, if the taxpayer invests the capital gains in a residential property jointly with someone else, they can claim exemption under Section 54F in proportion to their share of investment.

10. What happens if I sell the new residential property within three years from the date of purchase?
If the taxpayer sells the new residential property within three years from the date of purchase, the exemption claimed earlier will be reversed, and the amount of capital gains exempted earlier will be taxable in the year of sale.