Exemption from long term capital gain u/s 54F of Income Tax Act 1961

[AMIT BAJAJ ADVOCATE]

If you have sold a long term  capital asset other than residential house you can save the tax payable on the long term capital gain arising from such sale by investing the sale proceeds into a residential house u/s 54F of Income Tax Act 1961. 

Here below the provisions of section 54F have been discussed. 

Exemption is available to Individual and HUF: Exemption u/s 54F is available only to an Individual and HUF assesses. Therefore if a firm or company etc (i.e. other than individual and HUF assesses) have any long term capital gain, no exemption u/s 54F will be available to them. 

Exemption available only for purchasing or constructing residential house: Exemption u/s 54F is available only if the residential house is purchased or constructed from the sale proceed of the long term capital asset. Thus if an assessee builds or purchases warehouse, shop or factory building etc. then no exemption u/s 54F will be available. 

The Mumbai ITAT in its decision (2007) 11 SOT 646 has held that if a taxpayer has purchased the residential house then exemption u/s 54F will be available to him irrespective of the fact that such taxpayer has started residing in it or not. 

No exemption for purchase of a mere plot: If a person only purchases plot out of the net sale consideration from sale of long term capital asset then exemption u/s 54F will not be available as exemption is available for constructing/purchasing of a residential house and plot cannot be termed as house. 

 For example if a person sells long term capital asset say a shop for Rs 10 lakh and he purchases a plot of Rs 5 lakh out of it then he will have to construct residential house on it within 3 years of the date of transfer of original asset to claim exemption u/s 54F. 

Punjab & Haryana High Court has held in (2007) 164 Taxmann 382 that if the taxpayer has constructed on the plot purchased, a residential house within the requisite period of three years then exemption u/s 54F will be available. 

Residential house must be purchased in the name of the assessee: Mumbai High Court has held in (2008) 173 Taxmann 311/(2009) 312 ITR 40 that to get exemption u/s 54F it is necessary that person claiming exemption must purchase or construct residential house in his own name. If the residential house is purchased by the taxpayer in the name of his son then exemption u/s 54F will not be available. 

Quantum of exemption: For claiming full exemption u/s 54F, one must invest the whole of the net sale consideration into purchasing or constructing a residential house. If part of the sale consideration is invested then the quantum of exemption will be calculated proportionately to such amount invested and the rest of the capital gain will be taxable. 

For example if A has long term capital gain of Rs 5 lakh and the total sale proceed of such long term capital asset  is Rs.10 Lakh, then A will have to invest full 10 lakh in the residential house to get exemption of Rs 5 lakh. If A invests only 5 lakh in the residential house purchased/constructed then he will get exemption of Rs. 2.5 lakh only (i.e proportionately, half of the capital gain), since half of the sale proceed is invested in the house purchased/constructed. 

Residential house must be purchased or construted within requisite time: As per section 54F the new residential house must be purchased within one year before or two years after the date of transfer of original asset or must be constructed within a period of three years after the date of transfer of original asset.     

On the date of transfer, the assessee should not own more than one residential house: As per proviso to section 54F If the Individual or HUF assessee has more than one residential house on the date of transfer of original asset and income from it is chargeable to tax under the head House Property  then exemption will not be available u/s 54F. Thus if the assessee concerned owns two or more houses on the date of transfer of original asset then exemption u/s 54F will not be available. 

It is to be here noted that original asset here means the asset on which capital gain has arisen and for which the exemption is supposed to be claimed. 

Exemption is available only for constructing/purchasing one residential house: Section 54F(2) provides that if the assessee purchases a residential house within two years or construct within 3 years after the date of transfer of original asset, a residential house other than new asset then the long term capital gain which was not taxes due to exemption will be taxable in the year of purchase or construction. 

Thus it is advisable that from the net sale consideration of long term capital asset only residential house should be purchased/constructed and within period of three years from the date of transfer of original asset, another residential house should not be purchased/constructed. 

Some Important case laws: Mumbai ITAT has in (2009) 27 SOT 61 held that if a person has used borrowed money from Bank in purchasing the new residential house and the net sale consideration from sale of long term capital asset is used elsewhere then exemption u/s 54F will not be available,. Facts of this case was that the assessee had LTCG from shares amounting Rs 14,18,890. He took loan from bank to the tune of Rs 15 Lakh and used Rs. 2,29,355 from himself and thus purchased flat for Rs 17,29,355. The AO allowed exemption proportionately to the amount used by assessee from the sale consideration i.e Rs. 2,29,355. 

If the taxpayer has purchased house in the name of his son then no exemption u/s 54F will be available-(2002) 258 ITR (A.T) 114 Nagpur Tribunal 

If  the taxpayer has repaid security deposit to the tenent  fro getting the eviction of house then such amount shall not be added to the cost of new house purchased- (2005) 96 ITD 177 Mumbai ITAT.