Section 54F of Income Tax Act: Capital Gains Can Be Invested Multiple Times To Buy A New Residential House Property

Section 54F of the Income Tax Act provides exemption long term capital gains on sale of any capital asset (other than a residential house), provided one residential property is purchased. 

For claiming this exemption, the new residential property should be purchased within 2 years or constructed within 3 years from the date of sale of property. The new residential property purchased or constructed up to one year before sale of the capital asset can also be considered for exemption.

Exemption under section 54F is proportionate in nature, and can be claimed for multiple years, by investing in the same property. But overall, the maximum cost of the new asset to be considered for exemption calculation is fixed at Rs. 10 crore. 

This article explains in detail, the eligibility, conditions, manner of calculation, examples and recent case laws on claiming exemption under section 54F.

Eligibility to claim Exemption under Section 54F

Section 54F of the IT Act allows an exemption on capital gain from the sale of any property other than a residential house. This exemption is subject to certain conditions, which are:

• Taxpayer should invest the net sales amount of the old asset in purchase of a new residential house.
• The new residential property must be:
  • Purchased: either 1 year before or 2 years after the sale of asset Or 
  • Constructed: within 3 years of sale of old asset
• Taxpayer should not own more than one residential house on the date of sale, other than the one bought for claiming exemption under this section.
• Taxpayer should not purchase any other house within 2 years or construct within 3 years from the date of transfer.
• If the above conditions are not satisfied, then exempt Capital Gains taxable in the year in which such other residential house is purchased/ constructed.

Net Sale Consideration

Net sale consideration means the sale value of property after reducing the transfer expenses like legal fees, commission, registration charges, etc.,

How to Calculate Exemption u/s 54F?

Exemption u/s 54F is available to the amount invested proportionate amount of sales consideration. It can be arrived using the formula below.

54F Exemption = Capital Gains * Amount invested in residential property / Net Sale Consideration

Note:

When the amount invested in residential property exceeds Rs. 10 crore, the maximum amount taken for exemption calculation should be restricted to Rs. 10 crore. This change is applicable from 01st April, 2024. 

Let's understand this formula using an illustration! 

Illustration

Let's say Mr. X has sold his land to Mr. Sharma on 14-08-2024 for Rs.5 crores. He purchased the land in June 2020 for Rs.50 lakhs. He reinvested Rs.3 crores for purchase of a new residential property on August, 2025. He does not own any residential property on the date of transfer.

In this case, Long Term Capital Gains provisions are attracted as he held the property for more than 2 years. Therefore, indexation benefit is allowed in this case. He can claim exemption u/s 54F as in this case,

• He sold a Long Term Capital Asset other than house property, and used the sales proceeds in a house property. 
• He does not own any residential property on the date of transfer.
• Using the sales proceeds, he purchased of another residential property. Also, he made the purchase within 2 years of transfer.

Capital Gains are calculated as follows:

The entire amount of Rs. 3 crores can be taken for purchase of new residential property as it falls within Rs. 10 crores.

Differences Between Section 54 and 54F

Though section 54 and 54F appears similar on the face, they do have significant differences. Let's find out the key differences between section 54 and section 54F

Capital Gains Account Scheme

• We already know that the exemption can be claimed if the proceeds is invested in a new residential property within prescribed time limits. 
• But before he files the return for the relevant financial year, he should have deposited that amount in Capital Gains Account Scheme (CGAS). 

Some Common Questions Related to Section 54F

• If multiple properties are sold to buy a new residential house, then whether the exemption on capital gains arising on sale of all such properties will be allowed against the purchase of same residential house property.
• Also, if multiple properties are sold in different years to construct a residential property, whether multiple year exemptions u/s 54F will be available against the under-construction house.
  Recently a case law was decided in the courts which deals with a similar problem. Let’s understand it in more detail. 

Case Laws related to Section 54F

Case-1: ACIT New Delhi v Mahinder Kumar Jain ITAT Delhi (2014)

Facts of the Case 

• Taxpayer sold his commercial property and invested the proceeds in the construction of a farm house. He claimed a deduction of Rs.47.84 lakhs u/s 54F in 2008-09 against the investment made in construction of a farm house.
• In 2010-11,Taxpayer again sold five properties and invested further in the construction of the same house at Mehandi Farm. He claimed a deduction of Rs.1.59 crore under section 54F in his IT returns for 2010-11 against the investment made in the same house.
• Section 54F shall not apply where the taxpayer owns more than one residential house, other than the new asset on the date of transfer of the original asset. In this case, taxpayer was having one house at D-3/8 , Vasant Vihar Delhi which was let out and the other house at Mehandi Farms was under construction at the time of sale of five properties in the year 2010-11

The Decision

• The  Income Tax Appellate Tribunal (ITAT) Delhi allowed the deduction of Rs.1.59 crore under section 54F against the investment made in the construction of farm house.
• Taxpayer did not own more than one residential house on the date of sale of commercial property. The taxpayer had one house at D-3/8 Vasant Vihar, New Delhi.
• At the same time, the construction of residential house at 9, Mehandi Farms, Chhatarpur New Delhi was also not complete.
• Therefore he owned only one property at the time of transfer at Vasant Vihar, thus,he is eligible for the deduction under section 54F.
• Investing two times on a single residential property is very much allowed under section 54F. Therefore Rs.47.84 lakhs as well as Rs.1.59 crore can be considered for exemption calculation u/s 54F.  

Case-2: Lata Goel vs Income Tax Department (Delhi High Court)

• In the case of Lata Goel vs Income Tax Department, the Delhi High Court held that owning multiple floors in a single building does not qualify as owning multiple house properties. 
• Thus, allowing capital gains exemption worth Rs. 90 Crores to Lata Goel under Section 54F on the Income Tax Act despite Lata Goel owning two floors of a building in Vasant Vihar, Delhi. 
• The Income Tax Department's argument that owing separate floors in a building meant owing multiple house properties and exemption was to be disallowed was held wrong by the high court.  

Also Read
Section 54 of Income Tax Act