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ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
Section 54F offers an exemption from long-term capital gains tax on the sale of non-residential assets when the gains are reinvested in a new residential property within a specified timeframe.
As investments grow in value, it is important to understand capital gains taxes and how to reduce them. Luckily, taxpayers have some options like Sections 54 and 54F of the Income Tax Act, which offer tax savings for long-term capital gains from non-residential assets.
These sections can help you save on long-term gains if the profits are reinvested in a new residential property within a set timeframe.
Section 54F of the Income Tax Act 1961 provides an exemption from long-term capital gains tax on selling any capital asset other than a residential property. This means that if you sell a long-term capital asset like shares, stocks, bonds, gold, etc., and reinvest the sale proceeds in a new residential property within a specified timeframe, you can claim an exemption on the capital gains arising from the sale.
You can claim an exemption under Section 54F if you meet the following conditions:
However, the exemption is available for the lower of the entire long-term capital gain or cost of the new residential property. The exemption under section 54F has a cap of ₹10 crore, per the Budget 2023.
To qualify for a tax exemption on long-term capital gains from selling non-residential assets in India, you need to reinvest the “net consideration” of the sale into a new residential property. Take a quick look to understand what “net consideration” means:
You can understand this as when you have your full sale proceeds, you deduct the costs directly related to making the sale. You need to reinvest the remaining amount in a qualifying residential property within the specified timeframe to claim the tax exemption under Section 54F.
If you are looking to save tax on profits from selling long-term investments? Section 54F of the Income Tax Act might be your option. Some crucial conditions you need to meet to avail of the benefits of this section are:
Remember that tax exemption under Section 54F for reinvesting capital gains in a new house comes with a 3-year holding period. If you sell or transfer the new property before completing 3 years, there are consequences:
For example, you sold an asset for ₹50 lakh (long-term gain) and invested ₹40 lakh in a new house, claiming the exemption. But you sell the house after 2 years. In this case, 54F exemption calculation can be done using this formula:
Exemption under Section 54F = (Amount Re-Invested / Net Consideration) * Long Term Capital Gain
Withdrawn Exemption under Section 54F= Capital Gains Exemption * Year Left from Remaining 3-year holding period of 3 years
Using the above example,
Investor reinvests= ₹40 lakhs
Capital gains exemption= (40 lakhs/50 lakhs) * 10 lakh
= ₹8 lakh
Therefore,
Withdrawn exemption= ₹8 lakh * (1 year remaining out of 3 years) = ₹2.67 lakh.
₹2.67 lakh will be added to your income and taxed as long-term capital gain in the year you sold the new house.
To avoid this, you must:
Provisions outlined in Section 54F of the Income Tax Act can significantly benefit individuals seeking to minimize their tax liabilities on long-term capital gains from the sale of non-residential assets. Section 54F serves as a valuable tool for taxpayers, offering a structured pathway to optimize tax savings while encouraging the growth of their investments. As the financial field evolves, staying informed in utilizing such legal provisions becomes imperative for responsible and effective wealth management.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
