Tax liability arising due to capital gains from the sale of capital assets like land, buildings, shares, bonds, etc. can significantly create a financial burden on you. However, Income Tax Act provides several options to minimise your tax burden through availing benefits under section 54, 54EC, and 54F. These sections provide you relief when you reinvest your capital gain into certain specified assets. 

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In this blog we will explore each section in detail so that you can reduce or eliminate your capital gains tax and plan your financial future by reinvesting wisely.

Exemption under Section 54

If you sell your residential property and the sale proceeds are invested in another residential property within the specified timeline, then the amount of capital gain or cost of new property, whichever is lower, shall be exempted.

Eligibility:

• Individuals who sell a residential property classified as a long-term capital asset are eligible to claim an exemption under this section.
• The income from such property must be taxable under the head ‘Income from House Property’.

• Time for Investment: 

• You must either purchase another residential house within 1 year before or 2 years after the sale, or
• Construct a residential house within 3 years after the sale.

• Tax Implications

There can be three scenarios at the time of sale of residential property:

• If the amount of capital gain exceeds the cost of the new property, the excess gain will be taxable under the head ‘Income from Capital Gain’.
• If the amount of capital gain is less than or equal to the cost of the new property, there would be no tax on capital gain.
• If the amount of capital gain is equal to the cost of the new property, there would be no tax on capital gain.

• Lock-in-period

• You should hold new property for atleast 3 years from the date of purchase, otherwise, the exemption claimed earlier on capital gain will be disallowed and tax will be levied in the year of sale.

• Option to Invest in Two properties

• If the capital gain is up to ₹2 crore, you are allowed to purchase or construct two residential house properties instead of one, provided reinvestment is done within the specified time limit.
• This option can be exercised only once either in the year of sale or in any other financial year.

• Investment limit

• The maximum amount of exemption that can be claimed is up to ₹10 crore, even if the cost of the new property exceeds ₹10 crore.

• Capital Gains Account Scheme (CGAS)

• If the amount of capital gain is not reinvested by the due date of income tax return filing, such amount shall be deposited in a Capital Gains Account at the bank.
• Amount deposited in the Capital Gains Account should be utilised within 3 years, otherwise, it will be taxable under the head ‘Income from Capital Gains’.

2. Exemption under Section 54EC

• Applicability:

• Individuals who sell long-term capital assets such as land or buildings are eligible to claim an exemption under this section.
• You must invest the capital gains into specified bonds within six months from the date of sale of capital assets.
• Tax Implications
• If the amount of capital gain exceeds the cost of bond, the excess gain will be taxable under the head ‘Income from Capital Gain’.
• If the amount of capital gain is less than or equal to the cost of bond, there would be no tax on capital gain.
• If the amount of capital gain is equal to the cost of bond, there would be no tax on capital gain.

• Investment Limit

• The maximum amount of investment allowed in these bonds is ₹50 lakh per annum.

• Lock-in Period

• You should hold bonds for atleast 3 years (or five years for bonds issued after April 1, 2018) from the date of purchase, otherwise, the exemption claimed earlier on capital gain will be disallowed and tax will be levied in the year of sale.
• If you borrow money against the security of these bonds, it will be treated as if the bonds were sold, and the exempted capital gain will be subject to tax.

• Specified Bonds

Various bonds are eligible for exemption under this section such as:

• National Highways Authority of India (NHAI) bonds.
• Rural Electrification Corporation (REC) bonds.
• Power Finance Corporation Limited (PFC) bonds.
• Indian Railways Finance Corporation Limited (IRFC) bonds.
• Any other bonds notified by the Central Government.

• No Deduction Under Section 80C

• If an investment in these bonds is claimed as an exemption under Section 54EC, the same investment cannot be claimed as a deduction under Section 80C.

3. Exemption under Section 54F

• Eligibility

• Individuals who sell a property other than a residential house, classified as a long-term capital asset are eligible to claim an exemption under this section.
• You must invest the capital gains to purchase or construct a new residential house.

• Restrictions

The exemption will not be available if:

• If you own more than one residential house (excluding the new house) on the date of sale.
• If you buy or construct another residential house (other than new house) within one year or three years after the date of sale and construction must be completed within three years post transfer.

• Time for Investment, lock-in period, investment limit, and Capital Gains Account Scheme (CGAS) are the same as applicable for section 54.

Conclusion

Understanding the provisions under Sections 54, 54EC, and 54F is crucial for effective tax planning. These sections not only help reduce your tax liability but also enable strategic wealth growth. Ensure that all specified conditions are met to successfully claim the exemptions.

A qualified financial advisor can help you optimise the exemption benefits available under the Income Tax Act for effective tax planning. To optimise your taxes, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free tax planning experience.