Jigar M. Patel
International Tax Attorney
Under Section 54F of the Income-tax Act, capital gains arising in the case of an individual or Hindu Undivided Family (HUF) on the transfer of any long-term capital asset (held for more than 24 months), other than a residential house are treated as exempt subject to fulfilment of specified conditions. Such a long-term asset could include a plot of land, commercial property, jewellery and ornaments and shares and securities.
The relevant condition to be fulfilled in this regard is that the ‘net consideration’ arising from the transfer of such asset is invested either for the purchase or construction of a residential house within a stipulated time period. The time period prescribed for the purpose, in case of purchase is one year before or 2 years after and in case of construction 3 years from the date of transfer of such asset. The benefit of exemption under this section, is however available subject to the condition that the taxpayer does not own more than one residential house on the date of transfer of such asset.
Where Net Consideration not fully invested
Where the net consideration (sale proceeds less expenditure for transfer) arising from the transfer of the asset is not fully invested for the purchase or construction of the residential house, the exemption would be computed on a pro-rata basis.
Illustration: Kothari sold a plot of land in August 2025 for a net consideration of Rs. 2 crores. He had acquired the plot of land in June 2020 for Rs. 90 lakhs. He proposes to invest Rs. 1.20 crores in a residential flat by March, 2026. Since he owns only one house on the date of transfer, Kothari is eligible to the capital gains exemption under section 54F, which would stand computed as under:
- Net Consideration = Rs. 2 crores
- Long-Term Capital Gains (LTCG) = Rs. 1.10 crores
- Cost of Purchase of New House = Rs. 1.20 crores
- Proportionate Exemption = Rs. 66 lakh (1.10 crores x 1.20 cr./2.00 cr.)
- Taxable LTCG = Rs. 44 lakhs
Planning a Cocktail of 54F and 54EC Exemptions
In the above case, Kothari could plan to avail of zero tax in respect of the taxable LTCG of Rs. 44 lakhs by investing this amount in Capital Gain Bonds entitled to exemption under Section 54EC, within a period of 6 months from the date of transfer.
When exemption claimed u/s. 54F can be withdrawn
The exemption granted under Section 54F is liable to be withdrawn in any of the following two circumstances:
- If the taxpayer sells or transfers the residential house within 3 years of its purchase or construction; or
- If the taxpayer purchases within a period of two years or constructs within a period of three years from the date of transfer of the original asset, a new house, other than the residential house with reference to which the exemption was claimed.
54F provisions do not permit investment in Two Residential Houses
It needs to be borne in mind that, unlike the provisions of section 54, which permit investment in two residential houses in a case where the amount of LTCG does not exceed Rs. 2 crores (as a special one-time benefit), section 54F does not allow the benefit of investment of the net consideration in more than one residential house.
