Sec 54 provides relief from the tax on long term capital gains earned from residential property while Sec 54F covers assets other than this. However, there are certain rules which the assesse has to remember to claim benefits under these sections.Take the case of Rajeev who has invested in a land three years ago. He was amazed to see the appreciation of his investment. Without wasting time he sold the asset fetching handsome returns and bought another land which he expects to deliver him similar, if not more. But the rude shock came to him when he was denied the tax benefit on his gains and has to pay a hefty amount to income tax. The reason was misunderstanding of Sec 54F under which he was claiming the tax exemption.
Here I have discussed some of the rules under the two sections – 54 & 54F where an investor gaining from selling of property or other assets can claim tax exemption.
This is the section for availing tax benefit on long term capital gains arising from a residential property. Under this section if a residential house is sold after three year of purchase then one can avail tax exemptions on the gains by investing them in following options-
- A new residential property either bought within two years or constructed within three years from date of transfer of existing property. In case of buying a new property, the exemption is available even if it is bought within one year before the date of transfer.
- There might be a situation when you would not have decided on a new property but do not want to lock in the money in the bonds. In such instances, the money has to be deposited in a Capital Gains Account Scheme. This is a fixed deposit scheme specifically for long term capital gains earned from properties. The money can be kept there till three years, which is the threshold period for availing tax exemption. Till then you will be required to include the proof of deposit every year while filing your income tax return then only the tax exemption is available.
- The entire capital gains will be exempted where the amount of investment in new property or bonds is equal or greater than the capital gains earned.
One of the larger benefit of Section 54 is that one can hold n number of properties as on the date of transfer and still claim exemption on the gains.
This section is available to all those assets other than residential houses. So for claiming long term capital gains arising from selling of land, this section is utilized. Here one can claim relief on the tax liability on capital gains but with following conditions:
- The options for claiming exemption are the same as under sec 54 .
- The amount of exemption available is derived as
Amount of investment*Capital Gains/Net Consideration
- One of the primary conditions which differentiate this section from sec 54 is that the assesse can hold only one property other than the new residential property on the date of transfer. Even after three years of purchase of the new property, no new property can be bought else the capital gains become taxable.
- Thus, if one has made gains form a land then the exemption can be availed under Section 54F provided the conditions laid in the section are fulfilled.
- Unlike Sec 54, here the entire capital gains are exempted when the amount of investment is equal or greater than the net consideration else the proportionate exemption is allowed.
In both Sec 54 & Sec 54F, the exempted property cannot be sold within three years of acquisition else the taxability on gains will arise with respective section clauses. Both these sections are available to property investors for claiming long term capital gains tax exemptions. Apart from these, Capital Gains bonds under Sec 54EC are also available for claiming exemption of tax on long term capital gains earned from long term assets. But it’s wiser to take the help of an appropriate professional to utilize any of the sections illustrated here so that you do not face any disappointment later.Understanding Sec 54 & Sec 54F for Capital Gains by Jitendra P.S. Solanki