How do I claim tax exemption under 54F?

I used the capital gains from sale of stocks in FY 22-23 for constructing my house. This is my first property. I missed claiming tax exemption on the amount I spent on construction in ITR for FY2023. Can I revise the ITR and claim exemption under 54F? I will book more capital gains this fiscal year and utilise them for construction of the same house. Can I claim exemption under 54F in the next assessment year also?

—Name withheld on request

It has been assumed that you had earned long-term capital gain (LTCG) on sale of stocks (original asset) in fiscal 2023 and invested it in one residential house in India (new asset) which is still under construction.

With respect to fiscal 2023, as per Section 54F of the Income-tax Act, 1961, you are eligible to claim a deduction from LTCG arising on transfer of an asset (other than a residential house), with respect to re-investment of the net sales consideration (and not capital gains) into construction of one residential house in India (within a period of three years from date of transfer), subject to the other prescribed conditions.

If the net consideration from sale of the original asset is less than the cost of the new asset, then the whole of such LTCG shall be exempt. If the net consideration from sale of the original asset is more than the cost of the new asset, then the LTCG shall be exempt on a proportionate basis.

Assuming all the prescribed conditions were fulfilled in your case, however you had only missed claiming the deduction in your original tax return filed, you can still revise your tax return within 31 December to claim the exemption to the extent allowable.

It may separately be noted that Section 54F prescribes that in case the net consideration cannot be fully utilized towards construction of the new house till the date of furnishing the return under section 139 of the Act, then such unutilized amount should be deposited before the due date of filing tax return under section 139(1) of the Act, in a specified Capital Gain Account Scheme (CGAS) bank account with authorized banks and utilized in the manner prescribed, to avail of the entire deduction.

In case the said amount remains unutilized for construction of new asset, same shall be taxable upon expiry of 3 years from date of transfer of original asset. You may now not be able to satisfy this condition for FY2022-23 and the same can be challenged by the tax authorities. However, there are judicial precedents to support the contention that if ultimately the house in constructed within the overall timeline there should be no bar in claiming the exemption under Section 54/54F.

Few judicial precedents have held favourably that there is no bar in Section 54/54F towards claiming deduction in multiple years for the same property if the cost of the new property is within the capital gain/ net consideration as applicable.

Further, courts have also held that in case of an under-construction property, the date of completion of construction within 3 years (and not the commencement of construction) is relevant. Hence, a view may be taken that deduction under Section 54F could be available in fiscal 2024, for investment in the same under-construction property, provided all the other conditions for claim of deduction are fulfilled with respect to the LTCG for fiscal 2024 also, though possibility of this being challenged cannot be ruled out.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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