You might buy capital assets to create a source of funds for your financial goals, to plan your estate and also to plan your legacy. However, when you sell these capital assets, the profit that you gain from such a sale is called a capital gain. Such a gain is chargeable to tax but the Income Tax Act, 1961 allows tax-saving benefits on such gains. These benefits help lower your tax liability on the capital gains and increase your disposable income. 

One such tax-saving section of the Income Tax Act, 1961 is Section 54F that deals with the capital gains earned from the sale of capital assets. Let’s have a look at what this section is all about.

What is Section 54F of Income Tax Act?

Section 54F of the Income Tax Act, 1961 is a section that allows tax exemption on the long term capital gains earned from selling a capital asset, other than a house property. So, if you sell a capital asset like shares, bonds, jewellery, gold, etc. and reinvest the sale proceeds towards the purchase or construction of a house property, the returns earned on the sale of the capital asset would be allowed as an exemption from tax under Section 54F.

Here’s a quick example to clarify things further.

Number of shares that you own

10,000

Purchase price of the shares

INR 50

Cost of buying the shares

INR 5 lakhs

Selling price of the shares

INR 100

Amount received on selling the shares

100*10,000 = INR 10 lakhs

Capital gains earned

10 lakhs – 5 lakhs = INR 5 lakhs

Now, you invest the sale proceeds of INR 10 lakhs into a house property.

In this case, according to Section 54F of the Income Tax Act, the capital gain of INR 5 lakhs would not be taxed in your hands.

If, however, you use the amount of INR 10 lakhs to invest in any other asset, the gains of INR 5 lakhs would become taxable in your hands.

This is how Section 54F works.

Difference between Section 54 and Section 54F

The whole of Section 54 allows tax exemption on long term capital gains earned from selling capital assets. However, the section is divided into Section 54 and Section 54F. The main difference between these two sections is the type of capital asset sold. If you sell off a property or house property, the tax exemption on long term capital gains would be allowed under Section 54. However, for any other capital asset, i.e. except a property, the long term capital gain is exempted under Section 54F of the Income Tax Act. 

Requirements to claim an exemption under Section 54F

To claim a valid exemption under Section 54F of the Income Tax Act, you have to fulfil some basic requirements. These requirements are as follows –

  • The exemption is available to individuals and Hindu Undivided Families (HUFs)
  • To claim the exemption, the sale proceeds should be used in the following manner –
    • To buy a new residential property one year before the date of sale of the asset
    • To buy a residential property within 2 years from the date of sale of the asset
    • To construct a residential property within 3 years from the date of sale of the asset
  • If you invest a part of the sale proceeds in the property, the full exemption would not be allowed. In such cases, the exemption would be available on a proportionate basis. The amount of exemption would be calculated as follows –
    • Capital gains * amount invested / net consideration

    For instance, let’s take the above-mentioned example again –

    Number of shares that you own

    10,000

    Purchase price of the shares

    INR 50

    Cost of buying the shares

    INR 5 lakhs

    The selling price of the shares

    INR 100

    Amount received on selling the shares /net consideration

    100*10,000 = INR 10 lakhs

    Capital gains earned

    10 lakhs – 5 lakhs = INR 5 lakhs

Now, suppose, out of INR 10 lakhs, you invest only INR 6 lakhs in house property. In this case, the capital gain of INR 5 lakhs would not be fully tax-exempt. The exempted amount of gain would be calculated as follows –
Capital gains * amount invested / net consideration = 5 lakhs * 6 lakhs / 10 lakhs = INR 3 lakhs

So, for your capital gain of INR 5 lakhs, INR 3 lakhs would be exempted from tax but INR 2 lakhs would be taxed in your hands at your slab rates.

The eligible amount of deduction under Section 54F

The amount of deduction under Section 54F of the Income Tax Act depends on the amount invested towards the residential property. If you invest the entire proceeds towards a house property, the whole of the amount can be claimed as an exemption under Section 54F. If, however, you invest a part of the amount towards the house property, the exemption would be reduced proportionately. 

Let’s understand with an example. Suppose you sell a capital asset for INR 50 lakhs and earn a capital gain of INR 5 lakhs. Now, let’s take two scenarios –

Scenario 1 – You invest the entire amount of INR 50 lakhs into a house property.

Exemption available – Since you have invested the entire amount, you can claim the entire amount of long term capital gain, i.e. INR 5 lakhs, as an exemption.

Scenario 2 – You invest INR 35 lakhs towards the house property. You also incur INR 2 lakhs in selling expenses. In this case, the exemption would be calculated as follows –

Exemption = long term capital gain * amount that is reinvested / net consideration

= 5 lakhs * 35 lakhs / (50 lakhs – 2 lakhs)

= INR 3.65 lakhs (rounded-off)

The consequences of transferring the asset

The house property that you buy or construct using the sale proceeds of the capital gain should not be transferred or sold within 3 years of purchase or completion of construction. If you transfer the house property within 3 years, the exemption allowed under Section 54F of the Income Tax Act would be withdrawn and the capital gains incurred would become taxable from the year that the transfer takes place. 

Capital gain deposit account scheme

There might be times when you are unable to use the full or partial amount of the sale proceeds to invest in the purchase or construction of a new house property before the tax filing due date. In such cases, the capital gain deposit account scheme can come to your aid. Under this scheme, public sector banks allow you to deposit the sale proceeds in a capital gain deposit account. You can deposit the amount in such accounts and then use the proceeds completely or partially to purchase or construct a residential house property within the stipulated timelines to claim tax exemption.

Alternative methods to save income tax

Besides the exemption available under Section 54F, there are various other exemptions and deductions that the Income Tax Act, 1961 allows. Some of these ways to save taxes include the following –

  • Deductions under Section 80C

    This section allows tax deductions for different types of investments and expenses. Some of the eligible avenues include life insurance premiums, ELSS schemes, tuition fees paid for children, home loan principal repayment, PPF, EPF, NPS, SSY, SCSS, etc. You can claim a collective deduction of up to INR 1.5 lakhs by investing in Section 80C avenues.

  • Deductions under Section 80D

    Section 80D of the Income Tax Act, 1961 allows deductions for health insurance premiums. Premiums paid for self and family qualify for a deduction of up to INR 25,000. This limit increases to INR 50,000 if you are a senior citizen. Moreover, if you also pay the premium for your parents, you can claim an additional deduction of INR 25,000 which also increases to INR 50,000 if your parents are senior citizens.

  • Exemption under Section 24(b)

    If you avail of a home loan, the interest paid is allowed as an exemption under this section. The limit of exemption is INR 2 lakhs.

So, understand how you can reduce your tax liability using Section 54F of the Income Tax Act and also other sections of the Income Tax Act, 1961 and then plan your taxes effectively.


FAQ’s

No, the exemption of Section 54F is available if you sell any other asset except a property. So, if you are selling a property and investing the proceeds in another property, you cannot claim an exemption under Section 54F. You can, however, claim the exemption under Section 54.


Sections 54F and 54 are mutually exclusive. If you sell assets and invest in a house property, you can claim the benefit of Section 54F. However, if you already own a house property, the exemption would not be allowed. Since Section 54 allows exemption on the sale of a house property, it cannot be claimed in conjunction with Section 54F of the Income Tax Act. If, however, you sell a house property and don’t own any other house, and you sell other assets too and invest the aggregate proceeds towards buying a single house, then you can claim the exemption under both Section 54F and Section 54.



Yes, NRIs can avail of the exemption allowed under Section 54F. However, they would have to fulfil the requirements of the section to claim the exemption.