Section 54F of Income-tax Act, 1961 grants exemption from long-term capital gains (LTCG) when an assessee sells a long-term capital asset other than a residential house and invests the net consideration in purchasing or constructing a residential house property in India.
[1]
Applicability Conditions
Section 54F
applies if:
(i)
Nature of Asset Transferred
The asset transferred is a long-term
capital asset (other than a residential house).
(ii)
Eligible Assessee
The
assessee is :
o Individual,
or
o HUF.
[2] Investment Condition
The assessee invests in one
residential house in India:
- Purchase:
- Within
1 year before, or
- Within
2 years after the date of transfer.
- Construction:
- Within
3 years after the date of transfer.
[3] Ownership Condition (On Date of Transfer)
§
On the date of transfer, the
assessee does not own more than one residential house (other than the
new house).
§
If the assessee own more than one
residential house (other than new house) → Exemption not available
§
The assessee does not purchase
another residential house within 2 years or construct within 3 years (other
than the new house).
[4]
Quantum of Exemption
The exemption
is proportionate to the investment:
Case 1: Full Investment
If entire net consideration is
invested → Full LTCG exempt
Case 2: Partial Investment
If part of net consideration is
invested → Exemption proportionately reduced.
Amount
Exempt = Capital Gain X Amount Invested
Net Sale
Consideration
Example
Mr. A
sells a plot of land (held for 5 years):
§ Sale
consideration = ₹ 80,00,000
§ Transfer
expenses = ₹ 5,00,000
§ Indexed
cost = ₹ 30,00,000
Step 1: Net Consideration
80,00,000 – 5,00,000 = ₹ 75,00,000
Step 2: LTCG
80,00,000 – 5,00,000 – 30,00,000 = ₹
45,00,000
Scenario A – Full Investment
Investment in new house = ₹ 75,00,000
Exemption = 45,00,000 × (75,00,000 /
75,00,000) = ₹ 45,00,000 (Full exemption)
Taxable LTCG = Nil
Scenario B – Partial Investment
If you only invest a portion, the
exemption is proportionate.
The formula used is:
Exemption = Capital Gain x Amount
Invested
{Net Consideration}
Investment = ₹ 30,00,000
Exemption = 45,00,000 × (30,00,000 /
75,00,000) = ₹ 18,00,000
Taxable LTCG = 45,00,000 – 18,00,000
= ₹ 27,00,000
[5] Maximum investment eligible for
exemption is capped at ₹ 10 crore
As per the amendment by the Finance Act,
2023, the maximum exemption allowed on long-term capital gains (LTCG) under
Sections 54 and 54F of the Income Tax Act has been capped at ₹10 crore. This
restriction came into effect on April 1, 2024, and applies to the Assessment Year
2024-25 and subsequent years.
§ Any
investment above ₹ 10 crore will be ignored for exemption computation.
[6] Capital Gains Account Scheme,
1988
If the amount is not invested before the due
date of filing return under section 139(1):
- The
unutilized amount must be deposited in Capital Gains Account Scheme, 1988 (CGAS) before due date.
- If not
utilized within prescribed period → becomes taxable as capital gain in the
year of expiry.
[7]
Lock-in Condition
If
the new residential house is transferred within 3 years:
§ The
exemption earlier allowed becomes taxable.
§ Cost
of acquisition of new house is reduced by exempted amount while computing
capital gain.
[8]
Consequences if the deposit amount is not fully utilized for the
purchase or the construction of a residential house
If the amount deposited is not
utilized fully for purchase or construction of new house within the stipulated
period, then the following amount shall be treated as long-term capital gain of
the previous year in which the period of three years from the date of transfer
of original asset expires.
Unutilized amount x Amount of original capital gain
Net sale consideration
§
In
such a case, the assessee can withdraw the unutilized amount at any time after
the expiry of 3 years from the date of the transfer of the original asset in
accordance with the aforesaid scheme.
[9] Important Judicial Principles
Exemption available even if
construction is not fully completed within 3 years (substantial investment
test).
Entire Section 54F exemption cannot be disallowed only because construction of new house was not completed
Assessee sold a plot of land and earned LTCG, which was invested in
purchase and construction of a residential house and, accordingly, deduction
under section 54F was claimed, which, had been examined in detail and duly
allowed. However, Commissioner (Appeals) observed that capital gains had not
been appropriated towards acquisition of a residential house by way of purchase
and Construction timeline had not been met and, therefore, deduction under
section 54F was not allowable. Since amounts for purchase of property and
construction thereon were paid duly within relevant period, as prescribed under
law and that too from Capital Gains Account, disallowance of entire exemption
only because construction was not completed was without any basis and/or merit
and the said action of the Commissioner (Appeals) deserves to be quashed. [In
favour of assessee]
(Related Assessment year : 2015-16) – [Subramanian Swaminathan v. ACIT (2023)
152 taxmann.com 72 (ITAT Delhi)]
Section 54F relief could not be denied on non-execution of sale deed within time if possession was handed over to assessee
Assessee
sold a piece of land and claimed deduction under section 54F based on a purchase
agreement of a residential property. The assessee submitted sale agreement to
prove genuineness of deduction claimed under section 54F. The Assessing Officer
issued notice to the seller party which was not responded. Accordingly, the
Assessing Officer disallowed the deduction on ground that assessee had not
registered the property and only agreement of sale had been executed. On
appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.
On appeal to the Tribunal:
Held : The requirement of section 54F is that the assessee should purchase any residential house within a period of one year before or two years after the date of transfer of the property or construct a new residential house within a period of three years after the date of transfer. In the present case, there is no dispute that the assessee has entered into an ‘Agreement of Sale with Possession’ of the residential house, being a flat at HHS within time allowed in the Act. However, the property has not been registered. The assessee submitted that the entire sale consideration of Rs. 2.65 crores have been paid to the seller through banking channel by the assessee on various dates from 29.06.2017 to 27.06.2018. The assessee has also deducted TDS of Rs. 2.65 lakhs on the above payment. As per the agreement, the seller has conveyed to the assessee the vacant and direct possession of the entire property together with all rights and has stated that the assessee has become the sole and absolute owner of the property. The assessee shall have ownership and rights over the property to the same extent as the seller had. The Gujarat High Court in case of Kishorbhai Harjibhai Patel v. ITO (2019) 107 taxmann.com 295 (Guj.) has held that where assessee had executed an agreement to sell in respect of a house property and purchased a new residential property within one year from date of agreement to sell, even though sale deed could not be executed within time, section 54F relief was to be granted to assessee in respect of purchase of new residential property. While deciding the issue, the High Court has followed the decision of the Supreme Court in case of Sanjeev Lal v. CIT (2014) 46 taxmann.com 300 (SC) and stated that the Income-tax Act gives precise definition to the term ‘transfer’. It observed that in case of Sanjeev Lal (supra), it is very clear that an agreement to sell would extinguish the rights and the same would amount to transfer within the meaning of section 2(47). This definition of transfer given in the Act is only for the purpose of Income-tax. Accordingly, the issue was decided in favour of the assessee and against the revenue. In view of the facts discussed above and respectfully following the decision of the Gujarat High Court cited supra, the ground is allowed. [In favour of assessee] (Related Assessment year : 2017-18) – [Arvindbhai Ramniklal Raval (HUF) v. ITO (2025) 174 taxmann.com 120 (ITAT Surat)]
Provisions of Section 54F are beneficial provisions and are to be applied in accordance to the peculiar situation of each case; Allows Section 54F deduction, cites failure to construct property beyond Assessee’s control
Delhi ITAT allows Assessee’s appeal
observing that the Assessee is entitled to claim benefit of deduction under section
54F given that reasons for failure to construct the residential property was
beyond Assessee’s control, and forced Assessee to surrender its right to the
plot of land and invest in a new property; Tribunal highlights that the
Assessee got the provisional allotment for the residential plot on 27.05.2016
and subsequently made 3 installments, thereafter the Assessee claimed deduction
under Section 54F; Noting Assessing Officer’s observations, ITAT outlines that
due the failure to hand over possession of the respective plot of the land, the
Assessee failed to commence the construction of the residential house; ITAT
articulates that in the present case, the Assessee was clearly impeded from
taking possession of the plot of land, and the whole project got delayed due to
the national level dispute with the Central Govt./NHAI finally stepping in and
taking over the project of construction of the highway, and such reasons were
beyond the control of the Assessee; Tribunal outlines that due to this, the
Assessee surrendered its right to the said plot of land and claimed refund from
the builder, and subsequently purchased new residential property; Outlining the
Karnataka High Court decision in CIT v. Sambandam
Udaykumar (2012)
19 taxmann.com 17 (Karn.) held that section 54F is a beneficial provision for
promoting construction of residential house and in the given case also,
assessee has utilized the funds for the purpose of construction of residential
house and all the funds were utilized within the period of three years. Merely
because the approval and construction of the property was completed beyond the
period of three years, the same is not disentitled the assessee from the
benefit of exemption under section 54F of the Act, Madras
High Court decision in CIT v. Sardarmal
Kothari (2008) 302 ITR 286 (Mad.) the Madras High court held that Section
54F of Income tax Act is a beneficial provision for promoting the construction
of residential house and requires to be construed liberally for achieving that
purpose, Bombay High Court decision in CIT
v. Girish L Ragha (2016) 289 CTR 213 : 239 Taxman 449 (Bom.) and
other judicial precedents, ITAT opines that the provisions of Section 54F are
beneficial provisions and are to be applied in accordance to the peculiar
situation of each case. [In favour of assessee] (Related Assessment year :
2017-18) – [Rajni Kumar v. ITO, Gurgaon
[TS-1278-ITAT-2025(DEL)] – Date of Judgement : 17.09.2025 (ITAT Delhi)]
Assessee eligible for section 54F relief if second house occupied by him is situated in foreign country
Assessee, a non-resident, had sold
land in India and had claimed exemption under section 54F by reinvesting in residential
house in India. Benefit of section 54F was denied by Commissioner (Appeals)
solely on ground that assessee jointly owned two residential houses in USA.
Proviso to section 54F(1) which contains condition that deduction is not
available if assessee owns more than one residential house, other than new
asset, should be interpreted to mean ownership of residential houses in India.
Therefore, ground on which deduction under section 54F was denied that assessee
owned two residential houses in USA was not tenable. Assessee was entitled for
claiming deduction under section 54F for investments made in India in one
residential house within stipulated time limit. [In favour of assessee]
(Related Assessment year : 2015-16) - [Smt. Maries Joseph v. DCIT (International
Taxation), Kochi (2023) 148 taxmann.com 97 (ITAT Cochin)]
