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Capital Gain Exemption on Investment in Residential Property – Section 54F

Eligible Assessee

Only Individual and HUF can take exemption under this section.

Eligible Capital Gain

Capital gain arising from a transfer of long-term capital asset not being a residential house property. If the property sold is a house property then exemption is available under Section 54 and not under this section.

Condition for exemption

The assessee can claim exemption under this section when he has

a) purchased a residential house within a period of 1 year before or 2 years after the date on which such transfer took place

or

b) constructed a residential house within a period three years after the date on which such transfer took place

Such residential house should be purchased or constructed within India (Applicable from the assessment year 2015-16)

Conditions in which exemption is not available

The exemption under this section is not available if the assessee

(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or

(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset

If the assessee breaches (ii) or (iii) condition above then the capital gain exempted earlier shall be taxable as the Capital Gains in the year in which such condition is breached.

Amount of exemption

The amount of exemption will be lower of following

a) If the cost of new asset is equal or more than the net consideration received for the original asset than the whole of capital gain is exempted. b) If the cost of new asset is less than the net consideration received for the original asset, then the amount of exemption will be  (Capital Gain*Cost of new asset)/Net Consideration

Net consideration of original asset – Sale price of capital asset – Expenditure incurred wholly and exclusively in connection with such transfer.

Lock in period

If such new residential house property is transferred within three years of its purchase or construction, then the capital gain exempted earlier shall be taxable as the long-term Capital Gains in the year in which such property is transferred.

The benefit of Capital Gains Account Scheme, 1988 is available under this section.

Case Laws

A house property is owned by assessee’s wife and income from such property is clubbed in the hands of the assessee under sections 22,27 and 64. Such property cannot be treated as owned by the assessee for the purpose of disallowing exemption under section 54F. CIT vs S. Krishna Kumar (2012 Chennai), Maya Ajwani V. ITO (2015)

Exemption under section 54F is allowed even when the assessee purchased or constructed the residential house in the name of minor son/daughter or spouse or jointly with these. CIT vs N. Ram Kumar (2012 Hyderabad) CIT vs Kamal Wahal (2013 Delhi)

Even if the construction of the house has not fully completed but substantially completed, the deduction under section 54F is available. CIT vs Sambandam (2012 Karnataka)

Exemption under section 54F is available whether the residential house is constructed on agriculture land or non-agriculture land. CIT vs Om Prakash Goyal (2012 Jaipur)

It was held that assessee cannot be said to be the sole owner of a joint property to deprive him the benefit of section 54F to held that he is the owner of more than one property, which is jointly owned by another co owner, because it cannot be sold without permission of others. ITO V. Rasiklal N. Satra 98 ITD 335 Mum

Also Read

Capital Gain Exemption arising from Transfer of Residential Property – Section 54GB

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