Section 54F: 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 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 has held that taxpayer can invest capital gains for the second or third time also towards the same new house property. 

Section 54F of the IT Act allows an exemption on capital gain from 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 property 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.
• Budget 2023 update: The maximum deduction is capped at Rs 10 crore. However, this shall be effective from 1st April 2023.

Some common questions that get asked are

• 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 exemption 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 in more detail. 

Case Study
Facts of the Case 

• Taxpayer sold his commercial property and invested the proceeds in the construction of a house at Mehendi Farm.He  claimed a deduction of Rs 47.84 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 Mehendi Farm. He claimed a deduction of Rs 1.59 crore under section 54F in his I-T 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 residential house at D-3/8 , Vasant Vihar Delhi and the other house at Mehendi 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 house at Mehendi Farms.
• Taxpayer did not own more than one residential house on the date of sale of commercial property. 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, Mehendi 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.

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 within the capital gain arising to the taxpayer. In the above case ,the total capital arising to the taxpayer in all the three years 2009-10 to 2011-12 was less than the cost of construction of the residential property at Mehendi Farms, New Delhi. 

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

Frequently Asked Questions

Can I claim capital gains exemption under section 54F on sale of multiple properties?

A taxpayer who sells multiple properties and invests all proceeds into one house can claim an exemption under section 54F (refer ACIT v Mahindra Kumar Jain).

When can a taxpayer claim exemption under section 54F?

A taxpayer can claim capital gains exemption under section 54F upon the sale of any long term capital asset other than a residential house.

Who is eligible to claim capital gains exemption under section 54F?

An individual or HUF can claim a capital gains exemption under section 54F of the Income Tax Act by investing in residential house property.

Can I claim capital gains exemption under section 54F by depositing in capital gains accounts scheme?

You can claim exemption by depositing in capital gains accounts scheme before the due date for filing the income tax return.

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