Section 54F of Income Tax Act 1961: Definition, Exemption, Case Law & Example

1. Definition

2. How to Calculate Exemption u/s 54F?

   1. Illustration

3. Differences Between Section 54 and 54F

4. Capital Gains Account Scheme

   1. Illustration

5. Some Common Questions Related to Section 54F

6. Case Study

   1. Case No.1: ACIT New Delhi v Mahinder Kumar Jain IT APPEAL NO. 5254 (DELHI) OF 2014.

   2. Facts of the Case

   3. The Decision

   4. Takeaways from the Case Law

7. Frequently Asked Questions

Definition

Section 54F of the IT Act allows an exemption on capital gain from the sale of any property other than a residential house. This exemption is subject to certain conditions, which are:

1. Taxpayer should invest the net sales consideration of the old asset in purchase of a new residential house.

2. The new residential property must be:

   1. Purchased: either 1 year before or 2 years after the sale of asset Or 

   2. Constructed: within 3 years of sale of old asset

3. Taxpayer should not own more than one residential house on the date of sale, other than the one bought for claiming exemption under this section.

4. Taxpayer should not purchase any other house within 2 years or construct within 3 years from the date of transfer.

5. If the above conditions are not satisfied, then exempt Capital Gains taxable in the year in which such other residential house is purchased/ constructed.

6. The maximum deduction u/s 54F is capped at Rs.10 crore. This shall be effective from 1st April 2024.

How to Calculate Exemption u/s 54F?

Exemption u/s 54F is available to the amount invested proportionate amount of sales consideration. 

Formula

54F Exemption = Capital Gains * Amount invested in residential property / Net Sale Consideration

Let’s understand this formula using an illustration! 

Illustration

Let’s say Mr. X has sold his land to Mr. Prakalp on 14-08-2024 for Rs.5 crores. He purchased the land in June 2020 for Rs.50 lakhs. He reinvested Rs.3 crores for purchase of a new residential property on August, 2025. He does not own any residential property on the date of transfer.

In this case, Long Term Capital Gains provisions are attracted as he held the property for more than 2 years. Therefore, indexation benefit is allowed in this case. He can claim exemption u/s 54F as in this case,

• He sold a Long Term Capital Asset other than house property, and used the sales consideration in a house property. 

• He does not own any residential property on the date of transfer.

• Using the sales proceeds, he purchased of another residential property. Also, he made the purchase within 2 years of transfer.

Capital Gains are calculated as follows:

Since the exemption ceiling limit Rs.10 crores, the entire amount can be claimed as an exemption in this case.

Differences Between Section 54 and 54F

Though section 54 and 54F appears similar on the face, they do have significant differences. Let’s find out the key differences between section 54 and section 54F

Capital Gains Account Scheme

• We already know that the exemption can be claimed if the proceeds is invested in a new residential property within prescribed time limits. 

• But before he files the return for the relevant financial year, he should have deposited that amount in Capital Gains Account Scheme (CGAS). 

• If he has not filed the returns within the due date and filing belated returns, he should have deposited the investment amount in CGAS on or before 31st July of the next financial year.

Illustration 

• Mr. A has opted for exemption under section 54F for FY 2024-25. He wants to purchase the property for Rs. 5 crores. He filed the return on income on 15th June 2025. Now to claim the exemption, he should have deposited the money to CGAS on or before 15th June.

• If he missed the due date of 31st July 2025, and filed the belated returns on 5th August, he should have deposited the money to CGAS on or before 31st July 2025.

Some Common Questions Related to Section 54F

• If multiple properties are sold to buy a new residential house, then whether the exemption on capital gains arising on sale of all such properties will be allowed against the purchase of same residential house property.

• Also, if multiple properties are sold in different years to construct a residential property, whether multiple year exemptions u/s 54F will be available against the under-construction house.
  Recently a case law was decided in the courts which deals with a similar problem. Let’s understand it in more detail. 

Case Study

Case No.1: ACIT New Delhi v Mahinder Kumar Jain IT APPEAL NO. 5254 (DELHI) OF 2014.

Facts of the Case

• Taxpayer sold his commercial property and invested the proceeds in the construction of a farm house. He claimed a deduction of Rs.47.84 lakhs u/s 54F in 2008-09 against the investment made in construction of a farm house.

• In 2010-11,Taxpayer again sold five properties and invested further in the construction of the same house at Mehandi Farm. He claimed a deduction of Rs.1.59 crore under section 54F in his IT returns for 2010-11 against the investment made in the same house.

• Section 54F shall not apply where the taxpayer owns more than one residential house, other than the new asset on the date of transfer of the original asset. In this case, taxpayer was having one house at D-3/8 , Vasant Vihar Delhi which was let out and the other house at Mehandi Farms was under construction at the time of sale of five properties in the year 2010-11

The Decision

• The  Income Tax Appellate Tribunal (ITAT) Delhi allowed the deduction of Rs.1.59 crore under section 54F against the investment made in the construction of farm house.

• Taxpayer did not own more than one residential house on the date of sale of commercial property. The taxpayer had one house at D-3/8 Vasant Vihar, New Delhi; the same was let out during the year, which is also evident from the computation of income for the relevant assessment year, wherein the rental income from the same house has been declared as income from house property. This indicates that the taxpayer was not using that house as his residence during the relevant assessment year. At the same time, the construction of residential house at 9, Mehandi Farms, Chhatarpur New Delhi was also not complete and the taxpayer was residing during the relevant period in a residential property in the name of Hindu undivided family at E-222, Naraina Vihar, New Delhi. This fact is also evident from the documents such as telephone bill, copy of passports and copy of correspondences with IFCI. Even if it accepted that the appellant had one residential property at Vasant Vihar, New Delhi, apart from the new property at Mehendi Farms, New Delhi, the appellant did not own any other residential property as of the date of transfer. Thus, the taxpayer is eligible for the deduction of Rs.47.84 lakhs as well as Rs.1.59 crore under section 54F.

Takeaways from the Case Law

• There is no bar in Section 54F for claiming deduction for second or third time also for the same property if the cost of the property is less than Rs.10 Crores and is within the capital gain arising to the taxpayer. In the above case, the total capital arising to the taxpayer in all three years 2008-09 to 2010-11 was less than Rs.10 Crores as well as the cost of construction of the residential property at Mehandi Farms, New Delhi. 

• He did not own more than one house property at the time of transfer, and also for 3 years from the date of transfer as the farm house is still under construction phase. Therefore, a period of 3 years from transfer in case of construction and 2 years from transfer in case of purchase should be reckoned for determinig if more than one house property is owned by the assessee.  

Frequently Asked Questions

1. Can I claim capital gains exemption under section 54F on sale of multiple assets?

A taxpayer who sells multiple assets and invests all proceeds into one house can claim an exemption under section 54F (refer ACIT v Mahindra Kumar Jain).

2. When can a taxpayer claim exemption under section 54F?

A taxpayer can claim capital gains exemption under section 54F upon the sale of any long term capital asset other than a residential house.

3. Who is eligible to claim capital gains exemption under section 54F?

An individual or HUF can claim a capital gains exemption under section 54F of the Income Tax Act by investing in residential house property.

4. Can I claim capital gains exemption under section 54F by depositing in capital gains accounts scheme?

You can claim exemption by depositing in Capital Gains Accounts Scheme before filing the return of income or the due date for filing whichever is earlier

5. What is the time limit of Section 54F?

In order to claim exemption under Section 54F, new residential house property must be purchased within 1 year before or 2 years after the date of transfer or constructed within 3 years from the date of transfer.

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