Section 54F of Income Tax Act: Exemption of Long-Term Capital Gains

Capital assets are valuable assets or properties like home, car, property bought for investment purpose, bonds and stocks, pieces of art and so on. Investors acquire capital assets which act as a fund source to fulfil their financial goals. These capital properties when sold allow the investor to gain a profit known as capital gain. Such profits in the form of capital gains schemes are regarded as taxable income. However, under the income tax act of 1961, people are allowed to have tax exemption benefits for such gains. Such tax savings on capital gains can help to reduce your tax liability, while increasing the disposable income in your hand. As mentioned above, article 54F of income tax is a tax-saving section, which we will understand in detail, in this post. But before that let’s understand what a capital asset is?

So, what are capital assets?

Capital assets are valuable assets in the form of property held by a person. These properties can be your personal or related to business/profession. Capital assets include things like land, house, vehicles, machines, trademarks, jewellery, art pieces, patents etc.

However, the below mentioned things doesn’t fall under the purview of capital assets or capital gains exemptions:

• Raw material/consumables used for business
• Furniture, clothes etc., used for personal purpose
• Agricultural land in the rural areas

Types of capital assets

There are two types of capital assets, namely:

• Short term capital asset or STCA
• Long term capital asset or LTCA

Short – term capital asset –

Short Term Capital Asset is one which can be held for 36 months’ time period or even less just before its transfer date.

Long – term capital asset –

Long Term Capital Asset is an asset which can be held for 36 or more months just before its transfer date.

What is section 54F of income tax act?

Section 54F is a section of the income tax which allows the investor to avail tax benefits on their LTCA earned by the investor by means of selling capital assets excluding a house/residential property. Thus, this exemption can be gained if a person sells a capital asset such as bond, shares, a piece of jewellery, gold etc., and uses that amount to reinvest for purchasing or building a house/residence property. In this case, the investor can enjoy tax benefits for the returns gained by selling the capital asset to buy the house under section 54F.

Let’s do an analysis of section 54F of income tax act to understand it better in the example below:

Shares owned	10,000
Share purchase price (per share)	INR 50
Total cost of shares buying	INR 5,00,000
Share selling price (per share)	INR 100
Total share selling amount	100*10,000 = INR 10,00,000
Total capital gains earned	INR 10, 00,000 – INR 5,00,000 = INR 5,00,000

Now, if you use the sale profit (INR 10 lakhs) for buying a residential property, you will not be taxed for INR 5 lakhs of capital gain under section 54F of income tax. However, if the sales proceeds are used by the investor for investment in other assets, the person will not enjoy any tax benefits and the amount would be taxable.

So, this is the way in this section 54F functions.

What is Net Consideration u/s 54F?

To avail exemption under section 54F, there are certain terms that one needs to understand. One such term is Net Consideration. As per section 54F, Net Consideration is the complete value received from the sale of your asset after subtracting any incurred expenses. So, the taxpayer should reinvest the Net Consideration to get tax exemption of capital gain account scheme under section 54F.

So, Net Consideration means Full Value of Consideration minus Expenditure.

It arises from transferring LTCAs that are invested under the following categories:

• If the net consideration is used or reinvested for buying a residential property one year before the date of transfer or within two years of the transfer
• If the net consideration is used or reinvested for the construction of a residential property in the country within three years of transfer date

Section 54 vs Section 54F

Here are some differences between section 54 and section 54F:

Section 54	Section 54F
Tax exemption for long-term capital gains is available for the sale of a residential property	Tax exemption for long term capital gains is available for the sale of assets other than residential property
Union budget 2025 mentioned that INR 10 Crores can be claimed for deductions under section 54	As per this year union budget, the maximum tax exemption capped under section 54F is INR 10 Crores
It requires the complete capital gains amount to be invested to claim total exemption	Entire sale proceeds are required to be invested if you wish to claim total exemption
The amount remaining is taxed as long-term capital gains in case the complete capital gains are not invested	If the complete proceeds of net sale are not reinvested, the taxpayer can avail proportionate exemption under Sec 54F
Here, it is not mandatory for the taxpayer to have ownership of one or more residential properties	Here, ownership of more than one residential house is not allowed at the time of sale of an old asset

When can you claim an exemption under Section 54F

Below are the requirements to claim a valid tax exemption u/s 54F:

• Only individuals and Hindu Undivided Families (HUFs) can avail the exemption
• Taxpayer must use the proceeds of sale amount in the below way to claim the exemption:

• If taxpayer use the amount to purchase a new house within the duration of one year prior to the sale of the asset
• If it is used to buy a house during 2 years duration from sale of the capital asset
• If it is used to build a residential house within a duration of 3 years of the sale of the capital asset

• You must remember that investing only a portion of the proceeds of the sale amount in buying/constructing property, cannot let you avail full exemption on the proceeds. Here, exemption can be availed on a proportionate basis.

Here, the exemption amount is calculated as follows –

Capital gains multiplied by amount invested divided by net consideration

Deduction amount that is eligible u/s 54F of Income Tax Act

• The deduction that can be availed under Section 54F of the Income Tax Act as per the amount that is invested in buying/constructing residential properties
• If the complete sale proceeds are invested in buying/constructing a house property, the complete amount of the sale can be claimed for tax exemption u/s 54F
• And if a portion of the total amount is invested for buying/constructing a residential property, exemption is reduced proportionately