Saving tax on long-term capital gains

The Income Tax Act has laid out exemptions under Section 54 and Section 54F to help taxpayers save tax on capital gains.

(1)Exemption under Section 54 is available on long-term Capital Gain on sale of a House Property.

(2)Exemption under Section 54F is available on long-term Capital Gain on sale of any asset other than a House Property.

To reiterate, both the exemptions are available only on long-term capital gains.

Common requirements between the two Sections:

  1. A new residential house property must be purchased or constructed to claim the exemption
  2. The new residential property must be purchased either 1 year before the sale or 2 years after the sale of the property/asset.
  3. Or the new residential house property must be constructed within 3 years of sale of the property/asset
  4. If you are not able to invest the specified amount in the manner stated above before the date of tax filing or 1 year from the date of sale, whichever is earlier, deposit the specified amount in a public sector bank (or other banks as per the Capital Gains Account Scheme, 1988).
  5. Only ONE house property can be purchased or constructed.
  6. Starting FY 2014-15 it is mandatory that this new residential property must be situated in India. The exemption shall not be available for properties bought or constructed outside India to claim this exemption.

Differences between these two Sections:

Section 54 Section 54F
To claim full exemption the entire capital gains have to be invested. To claim full exemption the entire sale receipts have to be invested.
In case entire capital gains are not invested - the amount not invested is charged to tax as long-term capital gains. In case entire sale receipts are not invested, the exemption is allowed proportionately.
[Exemption = Cost the new house x Capital Gains/Sale Receipts]
  You should not own more than one residential house at the time of sale of the original asset.
This exemption will be reversed if you sell this new property within 3 years of purchase and capital gains from sale of the new property will be taxed as short-term capital gains. This exemption will be reversed if you sell this new property within 3 years of its purchase or construction OR if you purchase another residential house within 2 years of the sale of the original asset or construct a residential house other than the new house within 3 years of sale of the original asset. Capital gains from the sale will be taxed as long-term capital gains.

Key points to remember

  • If the cost of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately. For the remaining amount, you can reinvest the money under Section 54EC within 6 months.
  • The property must only be bought on the name of the seller and not on anybody else's name.
  • If the builder of the new residential construction fails to hand over the property to the taxpayer within 3 years of purchase, the exemption is still allowed.