Section 54F provides you exemption from the Capital Gains even if your sold property is ‘not a residential property’. But, the new property must be the residential property. This rule promotes the purchase of a residential house (for instance, it may be a commercial house property, plot of land, gold, shares, etc. but not a residential house property).
Conditions of Section 54F
These exemptions under Section 54F is available if the following conditions are satisfied:
- The assessee is an individual or a Hindu Undivided Family.
- The asset transferred is any long-term capital asset but other than a residential house.
- The assessee has purchased within 1 year before the date of transfer or 2 years after the date of transfer or constructed within 3 years after the date of transfer (or from the date of receipt of compensation in the case of compulsory acquisition), one residential house (new house).
- The following points should also be kept in view:
- Date of commencement of construction is not relevant.
- Allotment of flat under the self-financing scheme of the Delhi Development Authority (or under similar schemes of co-operative No. 471, dated on 5th October 1986 and Circular No. 672, dated on 16th December 1993.
- The new house property which is purchased or constructed within the time limit specified above should be situated in India (applicable from the assessment year 2015-2016).
- The Assessee should not own on the date of transfer of the original asset more than 1 residential house (other than the new house). He should also not purchase within a period of 2 years after such date or construct within a period of 3 years after such date any residential house (other than the new house).
Calculation of Exemption Under Section 54F
- If 100% of the sale proceeds is invested in the residential property, then the total capital gain would be exempted.
- The Exemption shall be allowed proportionately if the full capital gain is not invested. The amount that is exempted is calculated as follows:
Formulae: The Amount Exempted = (Capital Gain x Amount Invested)/ Net Sale Consideration
The exemption cannot be more than the capital gain.
Mr. Sanjay has 2 shops in Delhi. He used to live on rent. He sold a shop in March 2015 for Rs. 1,00,00,000/-. He purchased the shop for Rs. 50,00,000/- in January 2012. From the proceeds of the sold shop, he purchased a house in Gurgaon for Rs. 70,00,000/-. How much capital gains would be exempted for him?
Sanjay had bought the shop for Rs. 50,00,000/- and sold it for Rs. 1,00,00,000/-. He got the profit of Rs. 50,00,000 lakh. This Rs. 50 lakh should be taxed. But he again invested Rs. 70,00,000/- in a house, hence he would be eligible for capital gains tax exemption under section 54F.
Exempted capital gains would be = (50,00,000 x 70,00,000)/ 1,00,00,000
Total = Rs. 35,00,000/-.