Hello Folks,

Today, we are discussing about the Section 54F of the Income tax act, so let’s begin,

The Income Tax Act offers an exemption on long-term capital gains if you reinvest the proceeds into a new residential property, provided certain conditions are met. Recently, the Income Tax Appellate Tribunal (ITAT) in Delhi allowed taxpayers to claim this exemption under Section 54F even if they invest their capital gains multiple times in an under-construction house. This means you can use your capital gains again for the same house if needed.

Budget 2024 Capital Gains Updates

The 2024 Budget introduced changes effective from FY 24-25, focusing on how capital gains are taxed:

• Assets are now classified as long-term or short-term based on only two holding periods: 12 months and 24 months.
• For listed securities held longer than 12 months, they are treated as long-term assets.
• Unlisted bonds and debentures will be taxed at the applicable income slab rates, regardless of how long they are held.
• The tax rate for short-term capital gains from listed shares, equity-oriented funds, and business trust units has increased from 15% to 20%.
• Long-term capital gains tax on the transfer of equity shares or units has increased from 10% to 12.5%, with the exemption limit raised to Rs.1.25 lakh per year.
• For assets like land and buildings, sales made after 23rd July 2024 will either be taxed at 12.5% without indexation or at 20% with indexation, depending on the taxpayer’s choice if the property was acquired before 23rd July 2024. If acquired after this date, the tax rate will be 12.5% without indexation.

Section 54F: What You Need to Know

Section 54F allows you to claim an exemption on capital gains from selling any property (other than a house) if you reinvest in a new residential house. To qualify, you must:

1. Invest the net sales proceeds into a new house.
2. The house must be purchased either 1 year before or 2 years after the sale, or constructed within 3 years.
3. You should not own more than one house at the time of sale, excluding the one being purchased for the exemption.
4. You should not buy another house within 2 years or construct one within 3 years after the sale.
5. If these conditions are not met, the capital gains will become taxable in the year when the conditions are violated.

A key update from the 2023 Budget capped the maximum deduction under Section 54F at Rs.10 crore, effective from April 2024.

Assets for which Section 54F exemption is available

• Shares and Securities
• Land or property other than residential houses
• Jewelry, archaeological collections, drawings, paintings, or any art piece

Common Questions on Section 54F

• If you sell multiple properties to buy a new house, can you claim the exemption for all those sales?
• Can you claim Section 54F benefits over multiple years for an under-construction house?

A recent court ruling sheds light on these questions.

Case Study: Claiming Multiple Deductions Under Section 54F

Case Facts: A taxpayer sold a commercial property and invested Rs.47.84 lakhs in constructing a farmhouse, claiming a deduction under Section 54F in 2008-09. In 2010-11, he sold 3 more properties and invested Rs.1.23 crore in the same farmhouse’s construction. He again claimed a deduction under Section 54F.

However, Section 54F does not apply if a taxpayer owns more than one house at the time of sale, apart from the new one. In this case, the taxpayer owned a house in Vasant Vihar, Delhi, but it was rented out. The farmhouse was still under construction.

The Verdict: The ITAT allowed the taxpayer to claim the Rs.1.23 crore deduction, reasoning that he did not own more than one residential house at the time of sale. Although the Vasant Vihar house was owned by the taxpayer, it was rented out and not used as a residence. The farmhouse was under construction, and the taxpayer was living elsewhere. As a result, he was entitled to claim deductions for both Rs.47.84 lakhs and Rs.1.23 crore. For any queries, Contact us.

Key Takeaways from the Case

There is no restriction in Section 54F on claiming multiple deductions for the same property, as long as the total cost of the property is under Rs.10 crore and the capital gains stay within the taxpayer’s limit. In this case, the taxpayer’s total capital gains from 2008-09 to 2010-11 and the construction cost of the farmhouse were both under Rs.10 crore.

This ruling allows flexibility for taxpayers to invest their capital gains more than once in the same residential property.