Selling shares, mutual funds, gold or property at a profit triggers capital gains tax liability as per the income tax law. Especially when the gains are substantial, the resulting tax bill can be equally big.
However, the tax law also provide certain exemptions that can help taxpayers reduce or even eliminate the tax burden, provided specific conditions are met. This is where Section 54F of Income Tax Act comes into the picture.
How to claim up to ₹10 cr capital gains as exemption
If you recently made a large profit from selling a long-term asset, Section 54F can help reduce or even eliminate your tax liability, provided you reinvest the sale proceeds in a residential property.
This provision offers on sale of any asset, other than a residential house property. Be it stocks, gold, commercial buildings, they are eligible for exemption under Section 54F.
However, taxpayers must note that this tax relief is only applicable on long-term capital gains, meaning you should have held the the assets for more than 24 months (12 months in some cases) before selling it.
An individual can claim up to ₹10 crore in capital gains as an exemption. Unlike other capital gain exemptions, section 54F exempts only the amount reinvested in proportion to the sale consideration.
Eligibility to claim exemption
To qualify for capital gain exemption under Section 54F, taxpayers must reinvest the net sale proceeds from the original asset into a residential house .
The new residential property can be purchase either one year before or 2 years after the sale of the asset. Alternatively, taxpayers can construct a house within three years of the sale.
The law also places restrictions on ownership of other residential properties.
- Taxpayers should not own more than one residential house on the date of sale, apart from the new property being acquired under the exemption.
- They cannot purchase another residential house within two years of the sale or construct one within three years.
If any of these conditions are violated, the exemption claimed earlier can be withdrawn and become taxable in the year in which the breach occurs.
Once you sell the property, you can move the proceeds from the transaction to a capital gains account scheme. Doing so allows taxpayers to claim exemptions on LTCG for an extended period of time while following tax compliance.
Who can claim tax exemption section 54F
The following categories of taxpayers are eligible for exemption:
- Individuals
- Hindu Undivided Family (HUF)
- Non-residents
What is capital gains account scheme?
The (CGAS) was introduced by the central government in 1988 to help taxpayers preserve their eligibility for capital gains tax exemptions when they are unable to immediately reinvest the proceeds from a property sale. Since the timelines prescribed for claiming exemptions often extend beyond the due date for filing income tax returns, taxpayers can deposit the unutilised capital gains in a designated CGAS.
Such deposits are treated as a valid substitute for reinvestment until the funds are used for the specified purpose. However, short-term capital gains are not eligible for the capital gains account scheme, as exemptions under Sections 54 to 54GB apply only to long-term capital gains.
CCAS is helpful especially for construction of property as it takes longer duration and hence the investment cannot be made in one go. This scheme provides you with some additional time, while ensuring compliance with the income tax law as well as convenience.