Planning to Redeem Funds and Buy a House? Learn About this Section for Taxation Relief

All investors, across the entire planet, seek to earn profits from their investments. Profit may be virtual or actual gains. Virtual profit refers to the unrealised gains accrued from investments that haven’t been sold or redeemed, whereas booked profit is realised through closing a position.

Profit attracts taxation irrespective of whether one resides in India or any other country. When profits are realised from investments such as shares, mutual funds, or other securities, they are subject to taxation under the respective country’s Income Tax Act. Investors are liable to pay taxes on the profits earned, it may be long-term capital gains or short-term capital gains, based on the holding period of the investments.

However, income tax laws allow taxpayers to claim certain exemptions against capital gains, which can help reduce their tax liabilities. In this article, we will explore section 54F of the Indian Income Tax Act.

Sections 54 and 54F

Under Section 54 of the Income Tax Act, an individual or Hindu Undivided Family (HUF) selling a residential property can avail of tax exemptions on capital gains if the proceeds from the sale are invested in the purchase or construction of another residential property.

On the other hand, Section 54F allows individuals to claim exemptions from tax on any long-term capital gains (other than from the sale of the residential property) if the proceeds are utilised for the purchase or construction of a house within specified time limits.

From April 1st, 2023, the capital gains tax exemption under Sections 54 to 54F is restricted to Rs 10 crore. Earlier, there was no such threshold limit.

Important Points to remember:

• To claim full exemption, the entire sale receipts have to be invested.
• In case the entire sale receipts are not invested, the exemption is allowed proportionately. Exemption = Cost of the new house × (Capital Gains / Sale Receipts)
• You should not own more than one residential house at the time of sale of the original asset.
• This exemption will be reversed if you sell the new property within 3 years of its purchase or construction OR if you purchase another residential house within 2 years of the sale of the original asset or construct a residential house other than the new house within 3 years of the sale of the original asset. Capital gains from the sale will be taxed as long-term capital gains.
• The property must only be bought in the name of the seller and not in anybody else’s name.
• If the cost of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately. For the remaining amount, you can reinvest the money under Section 54EC within 6 months.
• If the builder of the new residential construction fails to hand over the property to the taxpayer within 3 years of purchase, the exemption is still allowed.

Conclusion:

In conclusion, Section 54F of the Indian Income Tax Act provides valuable avenues for individuals to mitigate their tax liabilities on long-term capital gains, particularly for investments other than residential property transactions. Overall, understanding and leveraging the provisions outlined in Section 54F can empower investors to make informed financial decisions and optimise their tax planning strategies effectively.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.