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

Income Tax allows exemption on the long term capital gain if you invest the gains/consideration in a new residential property subject to certain conditions. Recently, the Income Tax Appellate Tribunal (ITAT) Delhi has allowed multiple-year exemption u/s 54F for an under-construction house. It held that taxpayer can invest capital gains for the second or third time also towards the same new house property.

Budget 2024 Updates - Related to Capital Gains

Budget 2024 has proposed the following amendments effective from FY 24-25 - 

• For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed.
• The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months.
• Unlisted bonds and debentures are brought in line with the taxation on debt mutual funds and market-linked debentures. They will attract tax on capital gains at applicable slab rates. (i.e., they will be treated as short-term irrespective of the period of holding.)
• The taxation of Short-Term Capital Gain for listed equity shares, a unit of an equity-oriented fund, and a unit of a business trust has been increased to 20% from 15%. Other financial and non-financial assets which are held for short term shall continue to attract the tax at slab rates.
• For the benefit of the lower and middle-income classes, the limit on the exemption of Long-Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust has increased from Rs.1 Lakh to Rs.1.25 lakh per year. However, the rate at which it is taxed has increased from 10% to 12.5%. 
• The exemption limit of Rs. 1.25 lakhs has been increased for the whole of the year, whereas the tax rate changed on 23rd July 2024.
• The tax on long-term capital gains on other financial and non-financial assets is reduced from 20% to 12.5%. While on the other hand, the indexation benefit that previously was available on sale of long-term assets, has now been done away with. So, any sale of long term asset made from 23rd July, 2024, will attract tax rate of 12.5% only without indexation benefit. 
• However, sale of land and building made from 23rd July 2024 will attract a tax rate of 12.5% without indexation benefit or a 20% tax rate with the indexation benefit at the option of taxpayer, if such property has been acquired before 23rd July, 2024. For sale of properties acquired on or after 23rd July, 2024, the tax rate will be 12.5% without indexation which are qualified as long term assets.

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.

Budget 2023 update: The maximum deduction u/s 54F is capped at Rs.10 crore. However, this shall be effective from 1st April 2024.

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 Study

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; the same was let out during the year, which is also evident from the computation of income for the relevant assessment year, wherein the rental income from the same house has been declared as income from house property. This indicates that the taxpayer was not using that house as his residence during the relevant assessment year. At the same time, the construction of residential house at 9, Mehandi Farms, Chhatarpur New Delhi was also not complete and the taxpayer was residing during the relevant period in a residential property in the name of Hindu undivided family at E-222, Naraina Vihar, New Delhi. This fact is also evident from the documents such as telephone bill, copy of passports and copy of correspondences with IFCI. Even if it accepted that the appellant had one residential property at Vasant Vihar, New Delhi, apart from the new property at Mehendi Farms, New Delhi, the appellant did not own any other residential property as of the date of transfer. Thus, the taxpayer is eligible for the deduction of Rs.47.84 lakhs as well as Rs.1.59 crore under section 54F.

Takeaways from the Case Law

There is no bar in Section 54F for claiming deduction for second or third time also for the same property if the cost of the property is less than Rs.10 Crores and is within the capital gain arising to the taxpayer. In the above case, the total capital arising to the taxpayer in all three years 2008-09 to 2010-11 was less than Rs.10 Crores as well as the cost of construction of the residential property at Mehandi Farms, New Delhi. 

Details of Case Law
ACIT New Delhi v Mahinder Kumar Jain IT APPEAL NO. 5254 (DELHI) OF 2014.

Also Read
Section 54 of Income Tax Act

Capital Gains Exemption

Section 54F

Capital Gains Tax

Long-term capital gains

Short-term capital gain

Tax on Long-term Capital Gains on Equity Funds

Short Term Capital Gain on Shares