[Section 54F] : Exemption of Capital Gain on Transfer Of Long-Term Capital Assets other than a House Property

1. The Provisions of Section 54F towards Exemption of Capital Gains on Transfer Of Long-Term Capital Assets other than a House Property are given below –

1. Who can claim exemption :

An individual or a Hindu Undivided Family (HUF)

2. Which specific asset is eligible for exemption :

Capital gain arising on transfer of any long-term capital asset (other than a residential house property) is qualified for exemption provided on the date of transfer the taxpayer does not own more than one residential house property (except the new house property given below)

3. Which asset the taxpayer should acquire to get the benefit of exemption :

One Residential House Property in India.

4. What is time-limit for acquiring the new asset :

Purchase – Residential house can be purchased within 1 year before transfer or within 2 years after transfer

Construction – Residential house can be constructed within 3 years from transfer.

In the case of compulsory acquisition, these time-limits shall be determined from the date of receipt of compensation (original or additional)

5. How much is Exempt (Quantum of Deduction):

1. If the net sale consideration of the original asset is equal to or less than the cost of the new house, the entire capital gain shall be exempt.

2. If the net sale consideration of the original asset is greater than the cost of the new house then the exemption shall be allowed in the same proportion in which the cost of the new house bears to the net sale considerations i.e. it shall be allowed proportionately as under:

6. Is it possible to Revoke the Exemption :

In the following cases, exemption will be taken back (and the amount of exemption given exemption earlier will become long-term capital gain of the year in which the assessee commits the following default) –

  • If the new asset is transferred within 3 years from the date of its acquisition
  • If within 2 years from the date of transfer of the original assets, the taxpayer purchases another residential house property in India or outside India
  • If within 3 years from the date of transfer of original assets, the taxpayer completes construction of another residential house property in India or outside India.

IMPORTANT NOTES :

  1. Exemption is available under section 54F in respect of capital gains arising on transfer of any asset other than a residential house. Capital gain on sale of plots are also eligible for exemption.
  2. As per the circular of CBDT, the cost of the land is an integral part of the cost of the residential house, whether purchased or constructed.
  3. The construction of the new house may start before the date of transfer, but it should be completed after the date of transfer of the original asset.
  4. Net consideration means the full value of the consideration as a result of the transfer of the capital asset minus any expenditure incurred wholly or exclusively in connection with such transfer.

2. Scheme of Deposit in Capital Gains Accounts Scheme, 1988 :

The amount of net consideration, which is not utilised by the assessee for the purchase or construction of the new house before the date of furnishing of the return of income, shall be deposited, before the due date of the furnishing of the return of income, in a Capital Gains Accounts Scheme. The proof of such a deposit shall be attached with the return. In this case, the amount already utilised by the assessee for the purchase/construction of the new house, along with the amount, so deposited, shall be deemed to be the cost of the new house and shall be eligible for exemption.

For exemption u/s 54F only one house is allowed to be purchased/constructed. Where the assessee has purchased the house before the due date of return, he can still deposit the amount under capital gain scheme which can be for addition made to that house only.

3. Consequences where the amount deposited in the Capital Gains Accounts Scheme is not utilised, wholly or partially, for the purchase or the construction of a residential house within the specified period:

The exemption u/s 54F allowed earlier, proportionate to the amount not so utilised shall be charged as long-term capital gains of the previous year in which the period of 3 years from the date of transfer of the original asset expires (and not 3 years from the date of deposit in the account). In this case, the assessee shall be eligible to withdraw the amount from the scheme.

The amount which will be taxed as long-term capital gain can be calculated as per the following simplified procedure:

Step 1 : Calculate exemption already claimed u/s 54F in the year of transfer as under:

Step 2 : Calculate the exemption which would actually be allowed based upon the actual amount spent within the specified period.

Step 3 : Calculate the difference between the amount calculated in step 1 and step 2. This will be taxable as long-term capital gain of the previous year in which the period of 3 years expires.

The unutilised deposit amount in the Capital Gains Accounts Scheme, 1988 in the case of an individual who dies before the expiry of the two/three years stipulated period under section 54, 54B, 54D, 54F and 54G cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.In the case of transfer by way of compulsory acquisition by the government, the period of one year before or 2 years or 3 years for acquiring the new asset shall commence from the date of receipt of the compensation and not from the date of acquisition. Similarly, deposit under the Capital Gains Accounts Scheme may be made in the previous year in which the compensation is received or till the due date of filing of the return of income of the previous year in which the compensation is received.

4. Consequences where the new house is transferred within a period of 3 years of its purchase or construction :

In this case, there will be following 2 capital gains:

  1. Capital gain/loss on transfer of new house which will always be short-term capital gain/loss;
  2. Capital gain exempt earlier under this Section i.e. 54F shall be treated as long-term capital gain of the previous year in which the new asset is transferred.

5. Consequences where the assessee purchases, within a period of two years of the transfer of the original asset, or constructs, within a period of 3 years of transfer of such an asset, a residential house other than the new house bought / constructed, whose income is chargeable under the head Income from House Property:

In this case, the capital gain Exempt Under Section 54F earlier shall be treated as long-term capital gain of the previous year in which the second house is bought / constructed.

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