Understanding Capital Gains Tax Exemptions Under Sections 54 and 54F on the transfer of Long-Term Capital Assets
Jan 17, 2025
When it comes to managing capital gains tax on the transfer of long term capital assets, individuals
and Hindu Undivided Families (HUFs) have the opportunity to significantly reduce their tax burden
through specific provisions in the Income Tax Act. Two key sections that provide exemptions for longterm assets are Section 54 and Section 54F. Here’s a closer look at how these section work and the
benefits they offer.
Section 54: Exemption for Residential Properties
Overview:
Section 54 specifically applies to capital gains
arising from the transfer of a long-term capital
asset being a residential house and which is held
for more than 24 months from the date of
acquisition, chargeable under "Income from
House Property."
Key Benefits:
- If a taxpayer sells their residential property and purchase one residential house in India within
one year before or two years after the date on which transfer took place, or constructs a new
residential house in India within three years, they can claim an exemption from capital gains
tax.
- If the capital gain from the transfer exceeds the cost of the new residential house, the
difference is taxable under Section 45. However, if the capital gain is less than the cost of the
new asset, no tax is levied.
- If the amount of capital gain does not exceed two crore rupees, in such cases the taxpayer can
purchase or construct up to two residential houses in India. This is a one time opportunity
during the lifetime of the assesse.
- From 1st April 2023, the cost of the new asset for the purpose of exemption under this section
shall not exceed ₹10 crores.
- The new residential house shall not be transferred within a period of 3 years from the date of
purchase or construction.
Capital Gain Account Scheme:
If the taxpayer does not utilize the capital gain for purchasing or constructing a new asset within the
due date for filing the income tax returns under section 139(1), the unutilized amount must be
deposited in a specified account within the due date for filing income tax returns under section 139(1).
ILLUSTRATION
Facts:
Mr. Anup sold his residential property on 1st April 2024 for ₹50,00,000, resulting in a capital gain of
₹30,00,000 (sale price of ₹50,00,000 minus the indexed cost of acquisition of ₹20,00,000). He intended
to purchase a new residential property to claim an exemption under Section 54 of the Income Tax Act.
However, Mr. Anup failed to purchase or construct a new property by the due date for filing his return,
which was 31st July 2025.
Scenario and Outcome:
Mr. Anup failed to purchase or construct a new property by the due date for filing his return (31st July
2025).To avoid tax on the unutilized capital gain, Mr. Anup deposited the entire ₹30,00,000 into the
Capital Gains Account Scheme (CGAS) before 31st July 2025.
Non-Compliance:
A) If the deposited amount is not utilised wholly or partially towards the purchase or construction of
residential house within two years or three years, as the case may be, from the date of transfer, the
unutilised amount will be charged to tax under section 45(Capital Gains) as income of the previous
year in which the three -year period from the date of transfer of the original asset expires.
ILLUSTRATION (Continued):
Facts:
Mr. Anup sold his residential property on 1st April 2024 for ₹50,00,000.The capital gain on the sale was
₹30,00,000 (Sale price ₹50,00,000 – Cost of acquisiƟon ₹20,00,000).Mr. Anup intended to purchase a
new residential property to claim an exemption under Section 54.Since he failed to purchase or
construct the property by 31st July 2025, he deposited the entire ₹30,00,000 into the Capital Gains
Account Scheme (CGAS) before the due date (31st July 2025).
Scenario of Non-Utilization and outcome:
- By 1st April 2027 (three years from the date of transfer), Mr. Anup has stilll not used the
deposited amount of ₹30,00,000 for purchasing or constructing a new property.
- According to the rules, if the deposited amount is not utilized within 2 years for purchase or 3
years for construction, the unutilized amount will be charged to tax under Section 45 (Capital
Gains) as income for the year in which the three-year period expires.
- Since Mr. Anup did not use the ₹30,00,000 by 1st April 2027, the entire ₹30,00,000 will be
charged to tax as capital gains in the Assessment Year 2027-28.
- The unutilized amount of ₹30,00,000 will be treated as income of the previous year (i.e., 2026-
27) and will be taxed accordingly.
Conclusion:
- Even though Mr. Anup deposited ₹30,00,000 into the CGAS, because he did not use it within
the prescribed period (3 years for construction or 2 years for purchase), the amount is taxed
as capital gain income in the year 2027-28.
B) If the new asset is sold within a period of three years from the date of purchase or construction, the
cost of acquisition for the purpose of computation of capital gain shall be taken as NIL.
ILLUSTRATION
Facts:
Mr. Kumar sold his residential property on 1st April 2023 for ₹70,00,000, resulting in a capital gain of
₹40,00,000 (Sale price ₹70,00,000 – Indexed Cost of acquisition ₹30,00,000). To claim an exemption
under Section 54, Mr. Kumar purchased a new residential property for ₹50,00,000 on 15th December
2023. However, Mr. Kumar sold the new property on 1st December 2025 (within 3 years) for
₹60,00,000.
Outcome:
Since Mr. Kumar sold the new property within three years, the cost of acquisition of the new property
will be considered as NIL for the purpose of calculating capital gains. This means that the capital gain
on the sale of the new property will be calculated as the sale price of ₹60,00,000 minus ₹0 (cost of
acquisition). Therefore, the entire ₹60,00,000 will be subject to tax as capital gain, as the exemption
under Section 54 will be reversed due to the sale within three years of purchasing the new property.
Section 54F: Exemption for Other Long-Term Capital asset.
Overview:
Section 54F allows an exemption on long term capital gain from the transfer of any long-term capital
asset, not being a residential house. This could include assets like land, shares, gold, or any other long-term capital assets.
Key Benefits:
- To claim the exemption, the assessee must purchase within one year before or two years after
the transfer of original asset or construct a residential house in India within three years after
the transfer of original asset.
- If the cost of the new asset is more than the net consideration (Sale consideration – selling
expenses) in respect of the original asset, the entire capital gain is not taxed under section 45.
However, if the cost of the new asset is less than the net consideration, a proportionate
exemption is granted.
- From 1st April 2023, the cost of the new asset for the purpose of exemption under this section
shall not exceed ₹10 crores.
Important Conditions:
- Ownership Limitation: Taxpayer should not own more than one residential property on the
date of transfer, other than the one purchased for claiming exemption under this section.
- Restriction on Additional Purchases: After transfer of the original asset, the taxpayer must not
purchase any other residential house within two years or commence construction of another
property within three years from the date of transfer of the original asset.
- Restriction on transfer: The new residential house shall not be transferred within a period of
3 years from the date of purchase or construction.
Capital Gain Account Scheme:
- If the taxpayer does not utilize the net consideration for purchasing or constructing a new
asset within the due date for filing the income tax returns under section 139(1), the unutilized
amount must be deposited in a specified account within the due date for filing income tax
returns under section 139(1).
Non Compliance:
- If the deposited amount is not utilised wholly or partially towards the purchase or construction
of residential house within two years or three years, as the case may be, from the date of
transfer, the unutilised amount will be charged to tax under section 45(Capital Gains) as
income of the previous year in which the three -year period from the date of transfer of the
original asset expires.
- If the taxpayer purchases or constructs another residential house, other than the new one for
which exemption under this section is claimed, within the prescribed period (two years or
three years, as applicable), the capital gain that was exempted will be charged to tax under the
head “Capital Gains” in the previous year in which such purchase or construction takes place.
- If the taxpayer transfers the new asset within three years from the date of its purchase, the
capital gain exemption will be reversed, and will be charged to tax in the year of transfer.
Comparison of Section 54 and 54F
|
Particulars
|
Section 54
|
Section 54F
|
|
Capital gains
arising from
|
Residential house property
|
Asset other than
Residential house property (e.g., land, shares, gold)
|
|
Number of
properties
|
Must invest in one
residential property in India. However, if the capital gain is less than two
crore rupees, can invest on up to two residential proper es.
|
Must
invest in one residential property in India.
|
|
Ownership
Limits
|
No Limit on the
number of residential proper es owned on the date of transfer for claiming
exemption
|
Must not own more than
one residential property on the date of transfer
|
ILLUSTRATION:
Example for Section 54F
Mr. Anup sold gold for ₹16 crore, resulting in a net long-term capital gain of ₹12 crore. He invests in a
new residential property for ₹8 crore. Here, he can claim an exemption of ₹6 crore under Section 54F,
calculated as follows:
- Exempt LTCG = ₹6 crore (₹12 crore x ₹8 crore/₹16 crore).
Claiming Exemptions Under Both Sections
Sections 54 and 54F are independent provisions. Therefore, a taxpayer can claim exemptions under
both sections for different assets without restriction, provided they fulfill the specific conditions for
each.
Conclusion
Sections 54 and 54F offer valuable exemptions to taxpayers on long-term capital gains arising from the
transfer of long-term assets, including residential properties and other assets such as shares or gold.
These provisions can be a strategic tool for tax planning. Always ensure compliance with the conditions
outlined under these sections and consult a tax professional to navigate the complexities and ensure
maximum benefit from these exemptions.
Swathi S Shetty
Articled Assistant
Nitin J. Shetty & Co.
