Section 54F exemption: Observe timelines for selling asset, buying another

Recent judgement emphasises that co-ownership of multiple floors in the same building does not disqualify taxpayer for this exemption under Section 54F

The Delhi High Court recently upheld Lata Goel’s claim for a ₹90 crore exemption under Section 54F of the Income Tax Act for assessment year 2011–12. The exemption was against capital gains from the sale of FIITJEE Ltd shares, which she reinvested in purchasing a new residential house. The assessing officer (AO) opposed the claim, citing ownership of more than one residential property.

 

The AO relied on South Delhi Municipal Corporation records indicating Goel co-owned the basement and second floor of a property in Vasant Vihar, New Delhi, to argue that this disqualified her from being eligible for Section 54F. However, the Court ruled that co-ownership of different floors within the same building does not amount to owning multiple residential houses.

 

“The Delhi High Court clarified that ownership of multiple floors in the same building constitutes a single residential house under Section 54F of the Income Tax Act, 1961, despite municipal records showing separate units,” says Rajarshi Dasgupta, executive director – tax, AQUILAW. She adds that the Court prioritised substance over form, ruling that partial ownership of different floors does not equate to owning multiple properties. 

 

The term ‘residential house’ does not necessarily mean a ‘residential unit’. “As long as the taxpayer acquires a building for residential purposes, even if it is constructed with different units or floors for convenience, the requirement of the section should be considered as having been satisfied,” says Rupali Singhania, partner, Areete Consultants.

 

Who can claim

 

Section 54F benefits are available only to individuals and Hindu Undivided Families (HUFs). Companies, firms and other entities are not eligible.

 

“To be eligible, the person must have earned a long-term capital gain — that is, from the sale of a capital asset held for more than 12 or 24 months, depending on the asset type,” says Neeraj Agarwala, partner, Nangia & Co.

 

The taxpayer must invest in one residential house in India through either purchase or construction. They should not own more than one other residential house on the date of sale of the original asset.

 

Eligible assets

 

Section 54F applies to long-term capital gains from sale of assets other than residential property. “Such assets may include shares, units of mutual funds, land, etc.,” says Poorva Prakash, partner, Deloitte India. Gold, unlisted shares and commercial property also qualify if held for the requisite period.

 

Reinvestment conditions

 

The sale proceeds must be reinvested within a specified timeline. “Individuals/HUFs must either purchase one residential house property (new asset) in India, within one year before or two years after the sale of any asset other than a residential house property (original asset) or construct one new asset within three years from the date of sale of the original asset to claim exemption under Section 54F,” says Prakash.

 

The person must own only one property other than the new asset. “The purchase of multiple residential houses will invalidate the exemption — even if done within the allowed timeline,” says Agarwala.

 

The taxpayer should not purchase another residential house within two years from the date of transfer, or construct another house within three years from the date of transfer.

 

“If the taxpayer sells this new house within two years from the date of transfer, or constructs another house within three years, the earlier exempt capital gains become taxable in the year of sale of the new house,” says Agarwala.

 

Quantum of exemption

 

The full amount of capital gains is exempt if the entire net consideration is reinvested. “If only part of it is reinvested, exemption under Section 54F is granted proportionately. From 1 April 2024, the maximum exemption is capped at ₹10 crore,” says Dasgupta.

 

Singhania says that if the cost of the new asset is equal to or exceeds the net consideration from the sale of the original asset, the entire gain is exempt. “If it is lower, then the exemption is proportionate,” she adds.

 

Common errors

 

Taxpayers often fail to fulfil key eligibility conditions. “Many fail to reinvest the capital gains or deposit the amount in the Capital Gains Account Scheme (CGAS) before the income tax return (ITR) filing deadline,” says Dasgupta.

 

Singhania warns that taxpayers should not invest the proceeds in non-residential property or in commercial assets.

 

Maintain documents

 

To defend a Section 54F claim, taxpayers must retain sale deeds or share transfer documents, bank statements showing the investment or CGAS deposit, agreements for purchase or construction, payment receipts, registration proof such as the sale deed or possession certificate, CGAS deposit receipts (if applicable), and income-tax return acknowledgement showing the exemption claim. 

Points to know about CGAS scheme 

Capital Gains Account Scheme (CGAS) allows taxpayers to park capital gains amount temporarily if they are unable to reinvest it in purchasing or constructing a new house before the ITR filing deadline 

Applicable for claiming exemption under Section 54 or 54F

  Deposit must be made in a CGAS account with a designated public sector bank before the ITR filing due date

  Failure to deposit by the deadline disqualifies the taxpayer from the exemption

 

Use the deposited amount within two years for purchase, three years for construction

 

File ITR on time with declaration of deposit, maintain documentary proof