What’s the major difference between section 54 & section 54F of the Income Tax Act?

People tend to be confused about the tax exemption available under section 54 and section 54F of the Income Tax Act. Through this article, we have made a humble attempt to clarify the provisions related to these two sections in detail and will explain what’s the major difference between section 54 and section 54F as well.

So, without further, let’s get started. Happy reading!!

Section 54 – Exemption of capital gain arising on sale of residential property.

As per section 54 of the Income Tax Act, an eligible assessee can claim exemption of capital gains arising on the sale of residential property.

Let’s understand the provisions of section 54 🙂

What is the amount of exemption available under section 54?

The amount of exemption allowed under section 54, is as below:-

Capital Gain or Cost of new asset/amount deposited, whichever is lower

Are there any mandatory conditions that need to be satisfied in order to claim an exemption under section 54?

Yes, in order to avail the exemption under section 54 certain conditions must be satisfied, which are as follows:-

● The exemption under section 54 is available only to Individuals or HUFs (Hindu Undivided Family). It means they are considered as eligible assessees who can avail the exemption under Section 54.
● The nature of the asset transferred should be Long Term Capital Asset (LTCA).
● The asset transferred should be a residential house property being building & land.
● The capital gain amount arising should be used to purchase or construct a new asset being a one residential house property in India. It means eligible assessee won’t be able to claim tax exemption if the residential property is purchased outside India.
● The time limit to purchase a new asset is within 1 year before or 2 years after the date of transfer of the old asset and the time limit to complete the construction is within 3 years after the date of transfer of the old asset.

Please note – If LTCG arising on transfer of residential property is up to Rupees 2 crore, then eligible assessee can acquire two residential house properties in India instead of one under the prescribed limit. Although, this benefit of two residential house properties is available only once in a lifetime.

What will happen in case a new asset is transferred by an eligible assessee?

If a new asset is transferred by the eligible assessee within 3 years from the date of purchase or construction, then the cost of acquisition of new asset for the purpose of Income Tax shall be reduced by exempted capital gain claimed under section 54.

What will be the treatment of capital gain in case investment is not made in a new asset by an eligible assessee before the return filing?

The government has given an option to the eligible assessee, who is not able to make an investment in a new asset before the due date of filing of the return, to deposit the capital gain amount under the Capital Gain Account Scheme (CGAS) in order to avail the exemption under section 54. In this scenario, the amount deposited shall be deemed to be the cost of the new asset.

Please note – The deposit should be made before the due date or actual date of filing the return, whichever is earlier.

What will be the tax implication in case the amount deposited is not utilized?

If the amount deposited is not utilized for the specified purpose i.e, purchase or construction of new asset being residential property within the time limit specified in conditions (explained above), then the unutilized amount shall be chargeable as capital gain tax in the previous year in which the time limit expires.

Now, you understand the provisions related to section 54. Let’s discuss section 54F 🙂

Section 54F – Exemption of capital gain arising on sale of any capital assets.

As per section 54F of the Income Tax Act, an eligible assessee can claim exemption of capital gains arising on the sale of any capital assets. (This is the major difference between section 54 and section 54F.)

It means, under section 54F capital gain arising on transfer of any assets like bonds, shares, gold, land, residential property, etc shall be exempted. But that asset should be Long Term Capital Asset (LTCA) in nature. Therefore, exemption on selling short-term capital assets is not allowed under section 54F.

For a better understanding of section 54F, read the following.

Who is the eligible assessee to avail the exemption under section 54F?

An Individual or HUF (Hindu Undivided Family) is the eligible assessee who can claim the exemption under section 54F.

Are there any specified conditions that need to be met before availing exemption under section 54F?

Yes, the eligible assessee needs to fulfill the following conditions in order to avail the exemption under section 54F.

● The net consideration amount received on the transfer of any asset should be utilized for purchasing or constructing a new asset being a one new residential house property in India. If such a house property is situated outside India, then exemption under section 54F can’t be availed.

Additional conditions to satisfy under section 54F:-
● The eligible assessee should not own more than one residential house at the date of transfer of old asset.
● The eligible assessee availing the exemption should not purchase any other house within 2 years or construct any other house within 3 years after the date of transfer of old asset. (If this condition is not met then exempted capital gain shall be treated as taxable in the previous year, in which such other house is purchased or constructed.)

There are no such additional conditions as given above under section 54.

Is there any time limit specified to fulfill the above condition of
purchasing or constructing new residential property under section 54F?

Yes, in order to avail the exemption under section 54F the eligible assessee needs to abide by the following time limit:-

● Purchase a new residential property within one year prior to the sale of the old asset or within two years after the sale of the old asset.
● Construct a new residential property within three years from the sale of the old asset i.e, date of transfer.

Please note – The deposit scheme is also applicable under section 54F. It means an eligible assessee has the option to deposit the net consideration amount in CGAS (Capital Gain Account Scheme) before the due date or actual date of filing of return (whichever is earlier), in order to avail the exemption if an investment is not made in a new residential property before the filing of return. In this scenario, if the deposited amount is not utilized within the above-mentioned time period then it shall be taxable in the hands of the assessee on a proportionate basis.

What is the amount of exemption allowed under section 54F?

The amount of exemption allowed under section 54F, shall be computed as below:-

Capital Gain x Amount invested (i.e, cost of new asset) / Net consideration

Please note – If eligible assessee invested only part of the capital gain arising from transfer of any asset, then tax exemption shall be allowed proportionately. So, make sure to invest the total capital gain amount in order to avail the whole tax exemption.

What will be the tax treatment if a new asset purchased or constructed as per section 54F is transferred in the subsequent financial years?

When an assessee who has availed the exemption under section 54F and purchase or constructs a new residential house property transfer it within three years from the date of purchase or constructs then the exempted capital gain shall be taxable in the previous year (in which transfer of the new asset is sone) & shall be treated as Long Term Capital Gains (LTCG).

Hope, now must have got an understanding of the provisions related to section 54 and section 54F. We have summarized the same provisions (highlighting differences) in a tabular format as below for our reader’s quick reference.