Section 54F gives an exemption from long-term capital gains arising from the transfer of a long-term capital asset that is not a residential house if the proceeds are used to purchase or construct a residential house in India. The key is that the gain must be a long-term capital gain for Section 54F to be relevant.
About the author: Manmohan Sethumadhavan is a freelancer, investor, and personal finance enthusiast “in search of the absolute truth.” You can follow Manu on Twitter @ManuTsr. He is the author of the popular Revised Capital Gains Taxation Rules Ready Reckoner for FY 2025-2026.
Section 50AA is a new provision introduced by the Finance Act 2023. After the latest amendment, it says that, notwithstanding the definitions in section 2(42A) (which defines short vs long term if held for 24 months) if the asset is a Specified Mutual Fund (acquired on or after 1st April 2023) or a MLD, or unlisted bonds or debentures transferred or redeemed or matures on or after the 23rd day of July, 2024 – then the entire capital gains shall be “deemed” to be a short-term capital gain.
Specified Mutual Fund is defined as a fund which invests more than 65% in debt and money market instruments and an FoF that invests at least 65% in such funds. The effect is that even if the holding period would ordinarily classify the gain as long term, under section 50AA it is forced to be short-term for those specified assets. Thus section 50AA is a special override (a deeming clause) that changes the classification of the gain from a “long-term” to a “short-term” capital gain for certain assets.
So, contrary to the popular belief, the new amendments have not simply changed the taxation of long-term capital gains from Debt Funds and other assets mentioned above to slab rates, but it has changed the concept of “long-term” itself into “short-term” and effectively these assets have no “long-term” gains at all.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Want to create a complete financial plan? Learn goal-based investing? Exclusive access to our DIY tools? Increase your income with your skills? Use this link to enjoy massive discounts on our robo-advisory tool & courses! 🔥
The effect – No exemption u/s 54F
The language of section 50AA is one of deeming: “shall be deemed to be the capital gains arising from the transfer of a short-term capital asset” (i.e. even if it would otherwise be long-term). Because of that deeming, the gain loses the status of long-term for those units, and you cannot treat it as long-term.
Since Section 54F requires the capital gain to be long-term, if by application of 50AA the gain is “deemed short-term,” then you would not satisfy the prerequisite for 54F (i.e. being a long-term gain). Thus you cannot claim the exemption under 54F for that gain. If a tax officer applies this literal reading, the computing of gain and tax will be at slab rates and the taxpayer could be denied the 54F exemption.
Scope of litigation
In tax law, courts sometimes scrutinize deeming clauses narrowly. There may be tax authority rulings or judicial decisions in the future that interpret the interplay of 50AA and exemption provisions like 54F. The definitions and applicability of 50AA / 54F may be amended in future budgets or Finance Acts. There is a well‑established judicial guidance that deeming provisions are legal fictions limited to their object.
In similar cases, courts have refused to allow a deeming provision to be extended beyond the specific purpose for which it was enacted, and have accepted the taxpayer’s argument that a computation‑type deeming clause does not automatically change the legal character of the asset for unrelated exemption provisions. Section 50AA only deems the nature of the gain for computation, not the character of the underlying asset for the purposes of exemptions that require a long‑term capital asset.
Currently, there is limited direct judicial authority applying Section 50AA to Section 54F. So, while the practical and conservatively correct position is that 54F will not be available for funds within 50AA, a reasoned legal argument exists for a different outcome, and the point remains litigable and unsettled.
Use our Robo-advisory Tool to create a complete financial plan! ⇐More than 3,000 investors and advisors use this! Use the discount code: robo25 for a 20% discount. Plan your retirement (early, normal, before, and after), as well as non-recurring financial goals (such as child education) and recurring financial goals (like holidays and appliance purchases). The tool would help anyone aged 18 to 80 plan for their retirement, as well as six other non-recurring financial goals and four recurring financial goals, with a detailed cash flow summary.
🔥You can also avail massive discounts on our courses and the freefincal investor circle! 🔥& join our community of 8000+ users!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds, and ETF screeners, as well as momentum and low-volatility stock screeners.
You can follow our articles on Google News
We have over 1,000 videos on YouTube!
Join our WhatsApp Channel
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalised investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 13 years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), LinkedIn, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Increase your income by getting people to pay for your skills! ⇐ More than 800 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you. (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is designed to help you ask the right questions and find the correct answers. Additionally, it comes with nine online calculators, allowing you to create custom solutions tailored to your lifestyle. Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is designed for young earners to get their basics right from the start! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth exploration of vacation planning, including finding affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)