We all know that if we sell a residential property and purchase another one, no capital gain tax is required to be paid, provided certain conditions are fulfilled (Section 54 of the Income Tax Act, 1961). We are also aware that such an exemption is also available on profit from long-term assets other than residential property (Section 54F). Many believe that the amount to be invested in the new property to avail of the capital gain benefits is the same in both cases; however, this is not the case.
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Before we go into further details, let us summarise the exemption provided in both these sections:
Section 54:
- Exemption available for profit arising from the sale of ‘residential property and/or land appurtenant’ thereto
- Such an asset should be a long-term asset
- To claim the exemption, the ‘amount’ needs to be invested in another residential property
- Such investment is made within 1 year before the sale or within 2 years from the sale.
- In case of construction of the new property, the period is 3 years from the date of sale.
Section 54F:
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- Exemption available for profit arising from the sale of ‘any asset other than residential property’ (for e.g.: equity mutual funds, gold, land, etc)
- Such an asset should be a long-term asset
- To claim the exemption, the ‘amount’ needs to be invested in another residential property
- Such investment is made within 1 year before the sale or within 2 years from the sale.
- In case of construction of the new property, the period is 3 years from the date of sale.
Sales Consideration vs. Capital Gains Amount:
The ‘amount’ in both the above sections to claim the tax benefit is different. In Section 54, the amount required to be invested is the capital gains amount, whereas in Section 54F, the amount required to be invested is the net sales consideration. Let us understand this with an example.
Suppose Mr. A sold his long-term capital asset (a residential property for the purpose of Section 54 or equity mutual funds for the purpose of Section 54F) for Rs. 90 lakhs. The other details are:
- Purchase price of such asset sold – Rs. 40 lakhs
- Capital Gain – Rs. 50 lakhs
To claim the full long-term exemption under section 54 (where residential property is sold), Mr. A will have to purchase a new residential property for a minimum of Rs. 50 lakhs, which is the amount of capital gains.
Whereas to claim the full long-term exemption under section 54F (where equity mutual funds are sold), Mr. A will have to purchase a new residential property for a minimum of Rs 90 lakhs, which is the amount of net sales consideration.
Do notice that to claim the same amount of tax benefit, i.e. Rs 50 lakhs of long-term capital gain exemption, the amount to be invested is higher in case of Section 54F (Rs. 40 lakhs higher in our example) as compared to the amount to be invested in case of Section 54.
What happens if such an invested ‘amount’ is less than required as per these sections?
If the invested ‘amount’ is less than the required, the capital gain exemption will be reduced to such extent. In the above example, let us assume that the purchase price of the new residential property is Rs. 40 lakhs.
In this case, the exemption under Section 54 shall reduce to Rs. 40 lakhs, which is the amount invested and the balance long-term capital gains amount of Rs. 10 lakhs shall be offered to tax.
The exemption under Section 54F shall be calculated as follows:
Purchase price of new residential property ÷ Sale value of original capital asset X value of capital gains
In this case, it will be: Rs. 40 lakhs ÷ Rs. 90 lakhs X Rs. 50 lakhs = Rs. 22.22 lakhs. Balance of Rs. 27.78 lakhs shall be offered to long-term capital gain tax.
Other conditions:
Do note that there are other criteria to be fulfilled to claim exemption under both sections like the cost of new residential property is restricted to Rs. 10 crores, in case the amount is not used for this purpose till the time of the due date to file the return, it needs to be deposited in Capital Gains Account Scheme (CGAS) and to be utilised for this purpose within the time frame, etc. These and other conditions are not covered in this article.
Note: The corresponding clauses under the Income Tax Bill, 2025 are Clause 82 and Clause 86 for Section 54 and Section 54F, respectively.
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