Think of Section 54F as the equity investor's or gold seller's escape route from Long-Term Capital Gains (LTCG) tax — but only if you channel that money into a home. Unlike Section 54 (which covers sale of a house), 54F covers sale of ANY long-term capital asset that is NOT a residential house — shares, mutual funds, gold, jewellery, commercial property, you name it.
Who can use it and how? Only an Individual or HUF can claim this exemption. You sell a long-term asset and use the net consideration (sale price minus brokerage/transfer costs) to buy or build one residential house in India. The time window is: purchase within 1 year before or 2 years after the date of transfer, or construct within 3 years after transfer. If the cost of your new house ≥ net consideration → entire LTCG is exempt. If cost < net consideration → exemption is proportionate: Exempt LTCG = Total LTCG × (Cost of new house ÷ Net consideration).
Three critical conditions that can kill your exemption — and examiners love testing these. First, on the date of transfer of the original asset, you must NOT own more than one residential house (excluding the new one you're buying). Second, you must NOT purchase another house (other than the new asset) within 1 year after transfer. Third, you must NOT construct another house within 3 years after transfer. Break any of these, and the exemption vanishes. Also, if you sell the new house within 3 years of purchase/construction, the exempted gain gets taxed as LTCG in the year of that sale.
Capital Gains Account Scheme (CGAS): If you haven't used the full net consideration before filing your return (due date under Sec 139(1)), deposit the unused amount in a CGAS bank account. This amount is treated as the cost of the new asset for exemption purposes. If you don't use the CGAS amount within the specified period, the proportionate exempted gain becomes taxable in the year the 3-year period expires. This is asked frequently as a 4-mark or 8-mark question in CA Inter — know the formula and the three disqualifying conditions cold.
📊 Worked example
Example 1 — Full Exemption
Mr. Kapoor sells listed shares (held for 3 years) on 1 June 2024.
- Sale price: ₹80,00,000
- Brokerage paid: ₹1,00,000
- Net consideration: ₹79,00,000
- Indexed cost of acquisition: ₹30,00,000
- LTCG = ₹80,00,000 − ₹1,00,000 − ₹30,00,000 = ₹49,00,000
He purchases a residential house in Pune for ₹85,00,000 on 1 March 2025 (within 2 years).
Cost of new asset (₹85,00,000) ≥ Net consideration (₹79,00,000)
→ Entire LTCG of ₹49,00,000 is exempt u/s 54F.
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Example 2 — Proportionate Exemption + CGAS
Ms. Iyer sells gold jewellery on 10 July 2024.
- Net consideration: ₹60,00,000
- LTCG: ₹25,00,000
She buys a flat for ₹45,00,000 in August 2026 (within 2 years). She deposits the balance ₹15,00,000 in CGAS before filing her return.
Cost of new asset for 54F = ₹45,00,000 + ₹15,00,000 = ₹60,00,000 (equals net consideration)
→ Entire LTCG of ₹25,00,000 is exempt.
But suppose she uses only ₹40,00,000 of the CGAS amount and the 3-year period expires:
- Amount actually used = ₹45,00,000 + ₹40,00,000 = ₹85,00,000 — wait, let's re-do with correct figures.
Suppose she buys a flat for ₹36,00,000 and deposits ₹0 in CGAS.
Exempt LTCG = ₹25,00,000 × (₹36,00,000 ÷ ₹60,00,000) = ₹25,00,000 × 0.60 = ₹15,00,000 exempt
Taxable LTCG = ₹25,00,000 − ₹15,00,000 = ₹10,00,000 charged u/s 45
⚠️ Common exam mistakes
- Confusing 54 with 54F: Students apply 54F to sale of a residential house — that's wrong. 54F applies only when the original asset is not a house. Sale of a house → use Section 54.
- Using sale price instead of net consideration: The formula uses net consideration (sale price minus transfer expenses), not the raw sale price. Always deduct brokerage, commission, registration fees etc. first.
- Missing the 'only one house' condition: Students forget to check how many houses the assessee already owns on the date of transfer. Owning two or more (other than the new one) disqualifies the entire exemption — even if every rupee is reinvested.
- Wrong time limits: Don't mix up — purchase is 1 year before / 2 years after; construction is 3 years after. Applying the 3-year limit to purchase is a common slip in exams.
- Ignoring CGAS when the return date falls before house purchase: If the house hasn't been bought by the ITR due date, the unspent amount must go into CGAS — not doing so means the exemption is denied for that amount. Always check whether the question mentions an ITR filing date.
📖 Bare Act text — Section 54F, Income Tax Act 1961
(click to expand)
(1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:Provided that nothing contained in this sub-section shall apply where—(a) theassessee,—(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head "Income from house property".Explanation.—"net consideration", in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.(2) Where the assessee purchases, within the period of two years after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head "Income from house property", other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such new asset is transferred.(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any schemewhich the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—(i) the amount by which—(a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds(b) the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset,shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and(ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid.
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