NEW DELHI
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For many investors, buying a house is the fulfilment of a long-cherished financial goal. And, it comes with several incentives. For one, the Income Tax (IT) Act provides homebuyers several tax sops to encourage and assist people to own a residential house. These tax breaks are given in the form of deductions on home loans and the rental income. A bigger incentive is the exemption on capital gains made from a house property if the gains are used to purchase another property. That’s not all. If you use the sale amount of your other capital assets, including shares (both listed and unlisted), mutual funds and gold, to buy a residential property, the long-term capital gains made on the said asset will also be exempt from tax. This tax exemption is available under section 54F.
There are three primary conditions to qualify for section 54F. First, the gains should be long-term (LTCG). Different capital assets have different holding periods criteria for LTCG. Second, the entire sale amount, and not just the capital gains, have to be used to buy the house property. Otherwise, you get a deduction on a proportionate amount of capital gains. Third, the exemption can only be claimed if the house property is bought one year before or after the sale of the capital asset, the proceeds of which you intend to reinvest in buying the property. If you use the sale proceeds to construct a house, the window for such reinvestment is three years.
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But there are concerns: what happens if the price of the house property is less than the sale proceeds of the capital asset sold? Also, what if you already own a house property that is let out on rent?
In this story, Mint addresses some of the lesser known facets of section 54F in an easy-to-understand question and answer format. Towards this end, we have considered shares as the capital asset, as an example.
How many properties can you own to claim exemption under section 54F?
You should not own more than one residential property at the time of sale of the shares. “If you already own one house, for taking benefit of this section, one more house can be bought. Whether the first house is on rent or self-occupied has no bearing on the eligibility,” said Nitesh Buddhadev is a chartered accountant and founder of Nimit Consultancy.
However, if the property bought to claim exemption under 54F is sold within three years of its purchase, the exemption will be revoked and the taxpayer will have to pay tax on the capital gains of the shares. “The primary objective of giving tax relief under section 54F is to encourage people to transfer their long-term assets into buying a house. To ensure taxpayers don’t misuse this tax advantage to invest in several properties, these restrictions have been imposed,” said Buddhadev.
Can I use sale proceeds of stocks and house property together?
Yes, there is no condition that gains from only one capital asset will qualify for exemption at a time. “There is no restriction under the provisions to club both the sections (section 54 and section 54F) for a single house property, however, this can be questioned by some tax authorities. Also, it is important to note that the maximum deduction allowed under the respective sections has recently been capped at ₹10 crore,” said Maneesh Bawa, executive director, Nangia Andersen LLP.
You may also use sale proceeds from two capital assets qualifying under section 54, say shares and gold, together.
What if the sale amount of shares is higher than the purchase price of the property?
In such a case, the capital gains made on shares to be exempted from tax will be in proportion to the purchase price of the new property. Buddhadev said the formula to calculate exemption is LTCG divided by total sale amount and then multiplied by the amount of reinvestment.
Can I also use gains from debt funds to buy property?
Reinvesting sale consideration of debt funds into a house property may not qualify for exemption under section 54F from the current financial year. For investments made in a debt fund from 1 April, redemptions will be treated as short-term gains, irrespective of their holding period. Since only long-term assets qualify for section 54F, debt funds have lost this tax advantage.
Take note that LTCG on debt fund investments made until 31 March will be eligible for exemption under section 54F. “The changed tax treatment of debt funds is applicable only on those units acquired on or after 1 April,” said Mayank Mohanka, founder, TaxAaram India and partner at SM Mohanka & Associates. “Say you invested in a debt fund in March and redeem it in May 2026, it will attract 20% tax and not at slab rate. Or you may use the sale proceeds to purchase a house property within a year and avail exemption under section 54F,” he said.
For debt fund units bought after 1 April, you may use the sale proceeds to fund a property purchase but the capital gains made will be taxed at your slab rate.
After selling shares, I have to file my Income Tax Return (ITR) before I can buy the property. What should I do?
If you intend to use the sale proceeds from shares to fund the property purchase, you must deposit the entire sale amount in a capital gain account scheme (CGAS) before filing the ITR for the relevant assessment year. By doing so, you won’t have to declare the capital gains made on the shares in your ITR. However, make sure that you use the amount deposited in CGAS to buy a property within one year of selling the shares, otherwise you will have to pay 10% tax on the capital gains.
“If you have declared such capital gains in ITR or paid advance tax on them, you won’t be able to get tax exemption even if you use the sale proceeds to buy a house within the stipulated time,” said Karan Batra, managing partner, Chartered Club.