Section 54F of Income Tax Act – Understanding Capital Gains Exemption

What is Section 54F?

Section 54F of the Income Tax Act 1961 helps you save tax on the profit (capital gain) made from selling an asset like land, gold, or shares, basically anything other than a residential house. 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.

Here is how it works:

You must invest the entire sale amount (not just the profit) in one residential house.
You can buy the new house either 1 year before or 2 years after selling the old asset.
Or, you can build the house within 3 years of the sale.
You should not already own more than one house at the time you sell the asset.
Also, you cannot buy or build another house within the next few years (2 years to buy, 3 years to build).

If you break any of these rules, the tax benefit is cancelled, and the capital gain becomes taxable in that year.

Starting April 1, 2024, the maximum deduction under Section 54F is capped at ₹10 crore. This cap is still applicable for the Financial Year 2025-26. This limit was introduced in the Union Budget 2023 and came into effect from April 1, 2024, applying to Assessment Year 2024-25 onwards.

So if you are planning to invest your gains into property, this section is a smart way to reduce your tax!

What is “Net Consideration” Under Section 54F?

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:

The total amount you receive for selling your asset (stocks, gold, etc.) is the “full value of consideration.”
Now, subtract any expenses you incurred specifically for the sale, like broker fees or legal charges. The amount remaining is the “net consideration.”

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.

What is the Eligibility to Claim an Exemption Under Section 54F?

As discussed above, under Section 54F of Income Tax Act, individuals and Hindu Undivided Families (HUFs) can claim exemption on long-term capital gains from assets other than residential property. To qualify, the person must buy or build a residential house in India either within one year before or three years after selling the original asset. The cost of the new house must be equal to or more than the net consideration received from the sale. However, the exemption is not allowed if you own more than one house (apart from the new one) on the date of transfer or buy another house within one year after the sale.

How to Calculate Exemption u/s 54F?

Calculating exemption under Section 54F is not too complicated. In fact, it follows a simple formula based on how much of your sale money you invest in buying a residential house.

Here is the formula for the same:

54F Exemption = Capital Gains × (Amount Invested in Residential Property/Net Sale Consideration)

Let us now understand this better with an example:

Mr. Raj sold a plot of land to Mr. Mehta on 10th July 2024 for ₹5 crores. He had originally bought the land in May 2020 for ₹50 lakhs.

In August 2025, he purchased a residential house for ₹3 crores.

Let us see if Mr. Raj can claim exemption under this section:

He held the property for more than 2 years, so long-term capital gains rules apply
He sold a non-residential asset and reinvested in a residential house
He does not own any other house at the time of sale
He bought the new house within 2 years from the date of sale

Now that he is eligible, let us do the capital gains calculation:

Particulars	Amount (₹)
Sale Price	5,00,00,000
Indexed Cost of Purchase (50,00,000 × 363 ÷ 301)	60,20,900
Long-Term Capital Gain	4,39,79,100

Now, let us calculate the exempt portion:

Exempt Capital Gains = 4,39,79,100 × (3,00,00,000/5,00,00,000)
Exempt Capital Gains = ₹2,63,87,460

So, the taxable capital gains = 4,39,79,100 - 2,63,87,460 = ₹1,75,91,64

What are the Key Considerations for Claim 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:

This exemption applies to both individuals and Hindu Undivided Families (HUFs).
It covers long-term capital gains, excluding the sale of residential property.
You cannot have more than one house on the date of selling the asset.
You must reinvest the entire net sale proceeds (sale amount minus expenses) in a new residential property.
For purchase, you must invest within one year before or two years after selling the asset.
For construction, complete construction within three years of selling the asset.
You should not sell the new house within three years from purchase/construction, or the exemption gets withdrawn.
Avoid buying another house (besides the one claimed for exemption) within one year of selling the asset or constructing another within three years. Otherwise, the exemption gets withdrawn.

What is the Capital Gains Account Scheme (CGAS)?

The Capital Gains Account Scheme (CGAS) was introduced in 1988 under the Income Tax Act to help taxpayers save tax on capital gains. If you sell a property and want to claim an exemption under Section 54 or Section 54F but have not yet bought or built a new house, you can deposit the money in a CGAS account.

This account works like a fixed deposit and gives you extra time to reinvest the capital gains. It must be opened in an authorized bank, and the amount deposited should only be used for buying or constructing a new house within the allowed time frame.

How much Capital Gains Exemption is Available Under Section 54F?

Under Section 54F of Income Tax Act, you cannot claim the capital gains exemption if you are unable to meet certain conditions. So, if, on the date of selling the asset, you already own more than one residential house (excluding the new one you are planning to buy), you will not be eligible. Also, if you purchase another residential house within 2 years or construct a second one within 3 years of the sale, the exemption will be denied. In short, the benefit is meant only if you are putting your money into just one new house, not multiple properties.

What are the Exceptions to the Capital Gains Exemption Under Section 54F?

The exemption under Section 54F of the Income Tax Act is available only under specific conditions, and there are certain exceptions where this benefit cannot be claimed.

Firstly, the exemption is allowed only to individuals and Hindu Undivided Families (HUFs). It does not apply to companies, firms, or other entities. Secondly, the exemption is available only when the capital gains arise from the sale of a long-term capital asset other than a residential house (for example, land, gold, or shares).

However, an exemption under this section is not available in the following cases:

If the taxpayer owns more than one residential house (excluding the new one being purchased) on the date of transferring the original asset.
If the taxpayer purchases another residential house within one year from the date of sale of the original asset (other than the new house being claimed for exemption).
If the taxpayer constructs another residential house within three years from the date of sale, apart from the house considered for exemption.

What are the Consequences that can Lead to Exemption Withdrawal Under Section 54F?

The exemption under Section 54F of Income Tax Act is provided with certain conditions, one of which is the mandatory 3-year holding period for the new residential property. If this condition is not fulfilled, the exemption can be withdrawn by the Income Tax Department.

If the taxpayer sells or transfers the new residential house within 3 years from the date of its purchase or construction, the capital gains exemption claimed earlier will be revoked. In such cases, the exempted amount becomes taxable as long-term capital gain in the year the property is sold or transferred.

This means the benefit you initially received under Section 54F will no longer be available, and you will be required to pay tax on that amount.

To avoid this situation, it is important to retain ownership of the new property for at least 3 years. Failing to do so could lead to additional tax liability and impact your overall financial planning.

Difference Between Section 54 and 54F

Section 54F and Section 54 Income Tax Act, 1961, both offer exemptions on long-term capital gains, but they apply to different types of assets and come with separate conditions.

Section 54 Income Tax Act applies when the capital gain arises from the sale of a residential house.
Section 54F Income Tax Act is applicable when the capital gain comes from the sale of any long-term asset other than a residential house, such as land, gold, or shares.

In both cases, the exemption is available only if the taxpayer invests the capital gains (or net consideration, in case of Section 54F) into a residential house property in India within the prescribed time limits. Additionally, both sections are available only to individuals and Hindu Undivided Families (HUFs), not to companies or other entities.

Benefits of Section 54F of the Income Tax Act

Section 54F offers several benefits to individuals and Hindu Undivided Families (HUFs) who wish to save tax on long-term capital gains, like:

Helps in Tax Savings: It allows taxpayers to reduce or completely avoid paying tax on long-term capital gains by investing the sale proceeds in a residential house.
Encourages Investment in Housing: By offering tax exemption on reinvestment, it promotes the purchase or construction of residential homes, supporting both individuals and the housing sector.
Applies to a Wide Range of Assets: The exemption is not limited to the sale of residential property and applies when the capital gain arises from the sale of other long-term assets.
Available to NRIs: Non-Resident Indians (NRIs) can also claim the benefit under Section 54F, provided the reinvestment is made in a residential property located in India.
Supports Long-term Financial Planning: This section encourages taxpayers to channel their capital gains into stable, long-term investments like real estate, which can also serve as a future asset or residence.

Final Thoughts

Provisions outlined in Section 54F of the Income Tax Act can significantly benefit individuals seeking to minimize their capital gains 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 about utilizing such legal provisions becomes imperative for responsible and effective wealth management.

FAQs on Section 16 of the Income Tax Act

What type of capital gains are covered under Section 54F?

Section 54F covers long-term capital gains from the sale of any asset other than a residential house (like land, gold, or shares).

Can companies or firms claim exemption under Section 54F?

No, only individuals and Hindu Undivided Families (HUFs) can claim this exemption. Companies, LLPs, or firms are not eligible under Section 54F.

What is the meaning of “Net Consideration” in Section 54F?

“Net Consideration” is the total sale price minus any expenses related to the sale (like brokerage or legal fees). It is the amount that you actually received from the sale.

How is the exemption amount calculated under Section 54F?

The exemption is calculated using this formula: Capital Gain × (Amount Reinvested ÷ Net Consideration). If the full sale amount is reinvested, you get full exemption.

What is the time limit for purchasing a new residential property to claim exemption?

You can buy a house within 1 year before or 2 years after the sale, or construct one within 3 years from the date of sale to claim the exemption.

Section 54F of Income Tax Act – Exemption of Capital Gains

What is Section 54F?

What is “Net Consideration” Under Section 54F?

What is the Eligibility to Claim an Exemption Under Section 54F?

How to Calculate Exemption u/s 54F?

What are the Key Considerations for Claim Exemption Under Section 54F?

What is the Capital Gains Account Scheme (CGAS)?

How much Capital Gains Exemption is Available Under Section 54F?

What are the Exceptions to the Capital Gains Exemption Under Section 54F?

What are the Consequences that can Lead to Exemption Withdrawal Under Section 54F?

Difference Between Section 54 and 54F

Benefits of Section 54F of the Income Tax Act

Final Thoughts

FAQs on Section 16 of the Income Tax Act

What type of capital gains are covered under Section 54F?

Can companies or firms claim exemption under Section 54F?

What is the meaning of “Net Consideration” in Section 54F?

How is the exemption amount calculated under Section 54F?

What is the time limit for purchasing a new residential property to claim exemption?

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