Know About Capital Gain Exemption U/S 54 F

Exemption U/S 54 F


Exemption U/S 54 F

Know About Capital Gain Exemption U/S 54 F

The Provisions of Section 54F Are Given Below-

Condition – Exemption under Section 54F Is Available If The Following Conditions Are Satisfied-

1.WHO CAN CLAIM EXEMPTION – Under Section 54F, Only An Individual Or A Hindu Undivided Family Can Claim Exemption? In Other Words, No Other Person Is Eligible For Claiming Exemption Under Section 54F.

  1. WHICH ASSEST IS QUALIFIED FOR EXEMPTION- Under Section 54F, Exemption Is Available Only If The Capital Asset Which Is Transferred Is A Long-Term Capital Asset But Other Than A Residential House Property (For Instance, It May Be A Plot Of Land, Commercial House Property, Gold, Share Or Anyt Asset But Not A Residential House Property.)
  2. WHICH NEW ASSET SHOULD BE PURCHASE OR ACQUIRED- To Claim The Exemption Under Section 54F, The Taxpayer Will Have To Purchase One Residential House Property (Old And New) Or Construct A Residential House Property (Hereinafter Referred To As “New House”). The New House Should Be Purchased Or Constructed Within The Time Limit Given Below –
For Purchasing A New House It Should Be Purchased Within One Year Before, Or Within 2 Year After, The Date Of Transfer Of The Original Asset.
For Constructing A New House The Construction Should Be Complete Within 3 Year From The Date Of Transfer Of Original Asset.

The Following Points Should Be Noted:

  • Time-Limit In The Case Of Compulsory Acquisition- In Case Of Compulsory Acquisition, The Time-Limit Of 1 Year,,2 Year, 3 Year Shall Be Determined From The Date Of Receipt Of Commencement (Whether Initial Or Additional)
  • Construction May Commence Before Transfer Of Capital Asset- Construction Of The House Should Be Complete Within 3 Year From The Date Of Commencement Of Construction Is Irrelevant. Construction May Be Commenced Even Before The Transfer Of The Original Asset- CIT V. Bharrrti Mishra [2014] 222 Taxman 2 (Delhi).
  • Allotment By Co-Operative Societies- Case Of Allotment Of Flat Under The Self-Financing Scheme Of DDA (Or Similar Scheme Of Co-Operative Societies Or Other Institutions) Is Treated As Construction Of House For This Purpose-Circular No. 471, Dated October 15, 1986 And Circular No.672, Dated December 16, 1993.
  • Holding Of Legal Title Not Necessary- Holding Of Legal Title Is Not Necessary. If The Taxpayer Pays Full Consideration Or Substantial Portion Of It(In Terms Of The Agreement To Sell) Within The Stipulated Period Given In The Table Above, The Exemption Under Section 54F Is Available , Even If Possession Is Handed Over After The Stipulated Period Or The Sale Deed Is Registered Later On.
  • Residential House Should Be Purchased/Acquired (May Or May Not Be Used For Residential Purposes) The Requirement Of Section 54F Is That The Property Should Be A Residential House. The Use Of The Property Is Not The Relevant Criterion To Consider The Eligibility For Benefit Under Section 54F. What Is Required Is Investment In A Residential House. Mere Non-Residential Use Would Not Render A Property Ineligible For Benefit Under Section 54F ,IF IT OTHERWISE IS A RESIDENTIAL HOUSE-MAHAVIR PRASAD GUPTA V. CIT[2006] 5 SOT 355 (Delhi)
  • Investment Made within The Time-Limit But Construction Not Completed. Exemption Under Section 54F Cannot Be Denied where Investment In Residential House Is Made Within Time-Limit But Construction Is Completed After The Expiry Of Time-Limit­­- Usha Vaid V. ITO[2012]53 SOT385(Asr).
  • Investment In The Name Of Transferor- It Is Necessary And Obligatory Top Have Investment Made In Residential House In The Name Of Transferor Only And Not In Name Of Any Other Person-Prakash V. ITO[2008] 173 Taxman 311 (Bom.). Constrary Ruling-CIT V. Kamal Wahal  [2013]30 Taxmann.Com34 (Delhi).
  • Live-Link Between Net Sale Consideration And Investment In New Property Not Necessary-Merely Because Capital Gain Earned Has Been Utilized For Other Purpose And Borrowed Funds Are Deposited In Capital Gains Investment Account, Benefit Of Exemption Under Section 54F Cannot Be Denited-J.V.Keishna Rao V. CIT [2012]54 SOT 44 (Hyd.).

Renovation Or  Modification Of An Existing House-Section 54F Does Not Provide For Exemption In Case Of Renovation Or Modification Of An Exisiting House-Pushpa V. ITO [2013]213 TAXMAN 191(Ker.).

Residential House Constructed On Agricultural Land-Cost Of Such Houser Is Eligible For Exemption Under Section 54F-CIT V. Om Prakash Goyal [2012] 53 SOT 158 (Jp.)

Amount Of Exemption- If The Above Conditions Are Satisfied, Then The Exemption Is Available On The Following Basis-


Capital Gains

Cost Of New House        ×    –––––––––––––––––––—-

Net Sale Consideration

Not More Than One Residential House Property Should Be Owned By Taxpayer- Under Section 54F, Exemption Is Available Only If On The Date Of Transfer Of The Original Assets, The Taxpayer Does Not Own * More Than One Residential House Property (Other Than The New House). He Should Also Not Purchase Within A Period Of Two Years After Such Date (Or Complete Construction Within A Period Of 3 Years After Such Date) Any Residential House (Other Than The New House).

New Asset Should Be Situated In India – The New House Property Which Is Purchased Or Constructed Within The Time-Limit Specified Above Should Be Situated In India.


  1. The Amount Of Exemption Cannot Exceed The Amount Of Capital Gain
  2. Cost Of The New House Includes Cost Of Land-Circular No. 667, Dated October 18,1993. Cost Of Vacant Land Appurtenant To, And Forming Part Of, A Residential Unit, Is To Be Considered For Claim Of Exemption Under Section 54F, Even If No Construction Has Been Done On Appurtenant Land-CIT V. Narendra Mohan Uniyal [2009]34 SOT 152(DELHI).
  3. NET SALE CONSIDERATION MEANS THE FULL VALUE Of The Consideration Received Or Accruing As A Result Of The Transfer Of The Capital Asset After Deduction Of Any Expenditure Incurred, Wholly And Exclusively, In Connection With The Transfer.
  4. If The Transferor Allows The Transferee To Retain And Apply A Part Of Total Consideration To Discharge The Mortgage To Which The Property Has Been Subjecte3d To, The Amount So Applied For Discharge Of Mortgage Would Have To Be Excluded From The Full Value Of Consideration – CIT V. N.M.A. Mohammed Haniffa [2001]115 Taxman 181 (Mad.).
  5. In Case Of Semi-Finished House, The Purchaser Will Have To Invest On Flooring, Wooden Work, Sanitary Work, Etc., To Make It Habitable. Therefore, The Investment In House Would Be Complete Only When Such House Becomes Habitable. Accordingly, The Expenditure Incurred On Purchase Of Semi-Finished House As Well As On Making The House Habitable Should Be Considered As Investment In Purchase Of Semi- Finished House. Subject To The Condition That Payment Is Made, During The Period Specified In Section54f –Saleem Fazelbhoy V. CIT[2006]9 SOT 603 (Mum.). Where, However, Investment Is Made Only For Renovation Or Modification Of An Exciting House, Exemption Under Section 54F Is Not Available-Pishpa V. ITO [2013]213 Taxman 191 (Ker.).
  6. Nowhere It Has Been Mentioned In Section 54 That Same Funds Must Be Utilized For Purchase Of Another Residential House; Requirement Of Law Is That Assessee Should Purchase Residential House Within The Specified Period And Source Of Funds Is Quite Irrelevant- Ishar Singh Chawala V. CIT[]2010[ 130 TTJ (MUM.)(UO) 108, MUNEER KHAN V. ITO[2010] 41 SOT 504 (Hyd.)

Circumstances When Exemption Granted Under Section 54F May Be Withdrawn – In The Following Cases, Exemption Granted Under Section 54F Can Be Withdrawn:

Defaults Consequences
If The Assessee Transfers The New House Within 3 Years Of Its Purchase/Construction.




If The Assessee Purchases, Within A Period Of Two Years Of The Transfer Of Original Asset, Or Constructs Within A Period Of Three Year Of The Transfer Of Such Asset, A Residential House Other Than The New House.

Capital Gain Which Arises On The Transfer Of The New House Will Be Taken As Short-Term Capital Gain. Besides, The Capital Gain Which Was Exempt Under Section 54F Shall Be Treated As Long-Term Capital Gain Of The Year In Which The New House Is Transferred.


Capital Gain Which Was Exempt Under Section 54F Shall Be Deemed To Be Income By Way Of Long-Term Capital Gain Of The Year In Which Another Residential House Is Purchased Or Constructed.





It May Be Noted That In 2 Supra, Capital Gain Is Chargeable To Tax Even If No Capital asset Is “Transferred” During The Year. It Appears That The Policy Of The Government Is To Give Exemption Under Section 54F To An Individual (Or HUF) Who Does Not Own More Than One Residential House Property And Who Wants To Purchase/ Construct (Only) One Residential House By Converting His Other Assets (Like Gold, Silver, Shares, Etc. ) If The Taxpayer Purchase/Constructs Two Or More Houses Within The Specified Time-Limit, Then He Becomes Disqualified To Claim The Exemption Under Section 54F And The Exemption Already Allowed  When The First House Was Purchased/Constructed Will Be Taken Back At The Time Of The Purchase Or Construction Off The Second House. This Rule Is Applicable Only If The Second House Is Purchase/Constructed Within The Specified Time-Limit As Stated Above.

In Point 2 In The Table (Supra), The Time-Limit Shall Be Determined From The Date Of Transfer Of Original Asset Even In The Case Of Compulsory Acquisition. For Instance, If A Plot Of Land Is Acquired By The Government On April 10, 2015 And Compensation Is Received On May 26,2017, Capital Gain Is Taxable For The Previous Year 2017-18 The Tax Payer Can Purchase A Residential House Within 2 Year Or Construct A House Within  3 Year From May 26,2017 To Claim Exemption  Under Section 54F Is Not Available.

Scheme Of Deposit In Respect Of Exemption Under Section 54F – The Provision Are Given Below-

What Is The Scheme Of Deposit- Under Section 54F, The New House Can Be Purchased/Constructed Within The Time-Limit Given Above (I.E. 2 Year/ 3 Year From The Date Of Transfer Of Original Asset). The Taxpayer Has To Submit His Return Of Income On Or Before The Due Date Of Submission Of Return Of Income (I.E. Generally July 31 Or September 30 Of The Assessment Year). If The Amounts Is Not Utilized For Purchase/Construction Of New House Till The Due Date Of Submission Of Return Of Income , Then It Should Be Deposited In “ Capital Gain Deposit Account Scheme”(Hereinafter Referred To As Deposit Account). On The Basis Of Amount Utilized In Acquiring The New Property And Amount  Deposited In The Deposit Account, The Assessing Officer Will Give Exemption Under Section 54F.

How The Deposit Account Should Be Utilized- By Withdrawing From The Deposit Account. New House Can Be Purchased/ Constructed Within The Period Given Above.

What Happens If The Deposit Account Is Not Fully Utilized. If The Amount Deposited Is Not Utilized Fully For Purchase Or Construction Of New House Within The Stipulated Period, Then The Following Amount Shall Be Treated As Long-Term Capital Gain Of The Previous Year In Which The Period Of Three Year From The Date Of Transfer Of Original Asset Expires[See Also Footnote 1, Para 179.4].


Underutilized Amount In The Deposit Account In Respect Of Which Exemption Was Claimed Under Section 54F. But Which Is Not Utilized Within. The  Specified Time-Limit For Purchasing/Constructing. A Residential House


      Amount of original capital gain

x   ————————————–

Net Sale Consideration


In Such A Case, The Assessee Can Withdrawn The Underutilized Amount At Any Time. After The Expiry Of 3 Year From The Date Of The Transfer Of The Original Asset. In Accordance With The Aforesaid Scheme.

Other Point – One Should Also Keep In View The Following –

1.If By Applying Section 54F, There Is No Income. In Hand Of A Minor Child To Be Added Under Section 64(1A). The Benefit Under Section 54F Cannot Be Denied To Minor Child On. The Ground That Father Of Minor Child Had Two Residential Houses. At The Time Of Transfer Of The Capital Asset-CIT V. Madam Lal Bassi [2004] 88 ITD 557(Hyd).

2.Where An Assessee Purchases Ground Floor Of A House And Later, When Vendor Builds First Floor, The Assessee Purchase First Floor By A Separate Sale Deed, The Assessing Authority Is Not Justified In Disallowing The Assessee’s Claim For Exemption Of Capital Gains On Ground That Ground Floor And First Floor Constitute Two Residential Houses And, Therefore, Provision Of Section 54F(2) Are Attracted-Hansa Bai Sanghi V. ITO[2004]89 ITD239 (Hyd.).

3.Only Required For Claiming Exemption Under Section 54F. Is Construction Of Residential House And It Does Not Matter That Hous Constructed. Is On Agriculture Land Or On Other Land-CITV V. Om Prakash Goyal[2012]53 SOT158 (Jaipur).

4.If House Properties Are Owned By Assessee’s Wife Then The Same Cannot  Be Treated As Owned  By The Assessee. For Disallowing Exemption Under Section 54F To The Assessee Nonetheless Income From Such Properties Are Clubbed. In The Assessee’s Hand Under Section 22, Rtead With Section 27 And 64-S. Krishna Kumar V. CIT [2012]22 Taxman .Com200(Chennai).

5.Once It Is Demonstrated That Consideration Received On Transfer Of A Capital Asset Has Been  Invested Either In Purchase Or In Construction Of A  Residential House, Even Through These Transaction Are Not Complete In All Respect As Required Under Law, The Same Would Not Disentile Assessee From Benefit  Of Exemption Under Section 54F-CIT[2012]50SOT 537 (Chennai). Usha Vaid V. ITO[2012]25 Taxman.Com 188 (Asr.).

6.Exemption Under Section 54F Will Be Admissible Even Where. The Assessee Has Registered Residential House Properly In The Name Of His Minor Daughter-N.Ram Kumar V. CIT[2015] 25 Taxman.Com 333 (Kar.).

7.Amount Spent Toward Making Additions Or Improvement In Habitable House Property. Would Also Be Eligible For Section 54F Exemption- Rahana Siraj V. CIT[2015]58 333 (kar.).

  1. Where An Assessee Owns More Than One Residential House Even Jointly. With Another Person, The Benefit Of Exemption Under Section 54F Is Not Available- M.J. Siwani V. CIT [2015]232taxman 335(Sc.).

Exemption U/S 54 F

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