What are the exemptions under section 54 and 54F

What are the exemptions under section 54 and 54F


There has been substantial increase in the sale of properties resulting in capital gain to the land owners giving the land to the developers and entering into Joint Development Agreement, receiving more than one flat from the builder and yet avoiding capital gains tax.  When a person is selling a capital asset in order to book profit he has to pay either short-term or long-term capital gain on the difference between the net sale consideration and the actual cost of acquisition. The Income-tax Act, 1961 has also specified various exemptions that are available on long-term capital gains.

 Exemption U/s 54 – Exemption to capital gains arising from transfer of a residential house property (being building or land appurtenant thereto), the income of which is chargeable under the head Income from house property.

 Exemption U/s 54F – Exemption to capital gains arising from transfer of a long-term capital asset other than a residential house property (for instance, it may be a plot of land, commercial house property, gold, shares etc but not a residential house property).

 The table below explains the provisions of section 54 and 54F in detail:



Section 54

Section 54F


Asset transferred

Residential House


Transfer of a long term capital Asset not being a residential house


Type of Capital gain

Long term


Investment should be made in

Residential House Property


How to invest

Purchase or construction


Time limit for construction

3 years from the date of transfer


Time limit for purchase

1 year before transfer or 2 years after transfer


Amount of exemption

Amount of investment.

Amount of investment * Capital gains /

Net sale consideration


If the amount is not invested before the date of filing return, what should be done?

Deposit in a Capital Gain Deposit Scheme in any specified Bank and enclose the proof of such

deposit with the return of income. (See Note 1)


What is the consequence if the full deposit is not utilised?

The amount will be taxable in the year of default. (Either if there is withdrawal and the amount is not utilized or at the end of three years of transfer and there is no purchase or construction)


Can the person hold any other house property on the date of transfer other than the

exempted asset (due to purchase one year before the date of transfer)?

Yes. The person can hold any number of house property on the date of transfer.

No. The person can hold only one house property other than the new exempted asset, otherwise he cannot claim exemption u/s 54F


Can the person purchase a new house property within 1 year from the date of transfer or constructs a new house property from 3 years from date of transfer other than the exempted asset?


No. If he does so, he will lose the exemption and he will be taxed in the year in which new asset is purchased

or constructed for the exempted amount as long term capital gain.


What is the consequence if the exempted house property is transferred within

three years of acquisition?

The amount of capital gain exempted from tax on the original asset will be reduced from the cost of acquisition of the new asset

The amount of capital gain which is claimed exempted will be taxed as such

in the year in which transfer takes place.


Nature of capital gain in case of the above default.

Short term Capital gain

Long term Capital gain.


Conclusion :

There may be some doubts as to whether the new property should be purchased in the name of the assessee himself? It is necessary and obligatory to have investment made in residential house in the name of the transferor only and not in name of any other person. However, if the property is registered in the name of the spouse for the purpose of security etc, the assessee would be the deemed owner of the property and exemption is available in such a case.


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