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Capital assets are valuable assets or properties like home, car, property bought for investment purpose, bonds and stocks, pieces of art and so on. Investors acquire capital assets which act as a fund source to fulfil their financial goals. These capital properties when sold allow the investor to gain a profit known as capital gain. Such profits in the form of capital gains schemes are regarded as taxable income. However, under the income tax act of 1961, people are allowed to have tax exemption benefits for such gains. Such tax savings on capital gains can help to reduce your tax liability, while increasing the disposable income in your hand. As mentioned above, article 54F of income tax is a tax-saving section, which we will understand in detail, in this post. But before that let’s understand what a capital asset is?
Capital assets are valuable assets in the form of property held by a person. These properties can be your personal or related to business/profession. Capital assets include things like land, house, vehicles, machines, trademarks, jewellery, art pieces, patents etc.
However, the below mentioned things doesn’t fall under the purview of capital assets or capital gains exemptions:
There are two types of capital assets, namely:
Short Term Capital Asset is one which can be held for 36 months’ time period or even less just before its transfer date.
Long Term Capital Asset is an asset which can be held for 36 or more months just before its transfer date.
Section 54F is a section of the income tax which allows the investor to avail tax benefits on their LTCA earned by the investor by means of selling capital assets excluding a house/residential property. Thus, this exemption can be gained if a person sells a capital asset such as bond, shares, a piece of jewellery, gold etc., and uses that amount to reinvest for purchasing or building a house/residence property. In this case, the investor can enjoy tax benefits for the returns gained by selling the capital asset to buy the house under section 54F.
Let’s do an analysis of section 54F of income tax act to understand it better in the example below:
| Shares owned | 10,000 |
| Share purchase price (per share) | INR 50 |
| Total cost of shares buying | INR 5,00,000 |
| Share selling price (per share) | INR 100 |
| Total share selling amount | 100*10,000 = INR 10,00,000 |
| Total capital gains earned | INR 10, 00,000 – INR 5,00,000 = INR 5,00,000 |
Now, if you use the sale profit (INR 10 lakhs) for buying a residential property, you will not be taxed for INR 5 lakhs of capital gain under section 54F of income tax. However, if the sales proceeds are used by the investor for investment in other assets, the person will not enjoy any tax benefits and the amount would be taxable.
So, this is the way in this section 54F functions.
To avail exemption under section 54F, there are certain terms that one needs to understand. One such term is Net Consideration. As per section 54F, Net Consideration is the complete value received from the sale of your asset after subtracting any incurred expenses. So, the taxpayer should reinvest the Net Consideration to get tax exemption of capital gain account scheme under section 54F.
So, Net Consideration means Full Value of Consideration minus Expenditure.
It arises from transferring LTCAs that are invested under the following categories:
Here are some differences between section 54 and section 54F:
|
Section 54 |
Section 54F |
|
Tax exemption for long-term capital gains is available for the sale of a residential property |
Tax exemption for long term capital gains is available for the sale of assets other than residential property |
|
Union budget 2023 mentioned that INR 10 Crores can be claimed for deductions under section 54 |
As per this year union budget, the maximum tax exemption capped under section 54F is INR 10 Crores |
|
It requires the complete capital gains amount to be invested to claim total exemption |
Entire sale proceeds are required to be invested if you wish to claim total exemption |
|
The amount remaining is taxed as long-term capital gains in case the complete capital gains are not invested |
If the complete proceeds of net sale are not reinvested, the taxpayer can avail proportionate exemption under Sec 54F |
|
Here, it is not mandatory for the taxpayer to have ownership of one or more residential properties |
Here, ownership of more than one residential house is not allowed at the time of sale of an old asset |
Below are the requirements to claim a valid tax exemption u/s 54F:
Here, the exemption amount is calculated as follows –
Capital gains multiplied by amount invested divided by net consideration
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To claim an exemption under section 54F, a taxpayer must purchase a property in the form of a house within 2 years from the date of selling the capital asset. Alternatively, if the taxpayer is using the amount to build a house, he/she must ensure the construction of the house is done within 3 years of the sale.
The deduction under section 54 actually depends on the amount of sale proceeds that the investor plans to invest in buying or constructing a new home property. If the entire amount is invested to construct or buy a home, you can claim tax benefits on the full claim. However, if only a part of the amount is invested, just the proportionate amount of long-term capital asset can be claimed.
Yes, you can use the 54F section even if you sell more properties than one. You can use all the proceeds to buy or construct residential homes and can apply for tax benefit under section 54F.
In case you are looking at claiming capital gains exemption under section 54F by depositing in the accounts scheme of capital gains, you must do that before the due date of ITR filing.
Under Section 54 of the Income Tax Act, individuals or HUFs selling residential house properties can avail tax exemptions from capital gains if they are invested in the buying or constructing a residential house property.
PayBima Team
PayBima is an Indian insurance aggregator on a mission to make insurance simple for people. PayBima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. PayBima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.
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