Selling gold or stocks? Section 54F of Income Tax Act may help you claim deductions if you do this

Income Tax Act rules: For many Indians, selling an asset like gold, land, commercial property or stocks can attract a hefty tax, even if they have held it for years. However, the government lets you cut that liability significantly through Section 54F of the Income Tax Act, 1961.

Section 54F, a lesser known provision of the Income Tax Act, allows taxpayers to save tax on long-term capital gains (LTCG) by reinvesting the money to buy a property. In India, LTCG is charged at the rate of a uniform 12.5% for most asset classes on sales made on or after July 23, 2024.

There are several nuances as to how Section 54F works. Read on to find out.

What is Section 54F of the Income Tax Act?

Section 54F is a provision that exists to encourage home ownership.

“Section 54F of the Income-tax Act, 1961 is a beneficial exemption provision which permits an individual or a Hindu Undivided Family to claim relief from long-term capital gains tax arising on the transfer of any long-term capital asset other than a residential house,,” according to Tushar Kumar, advocate at the Supreme Court of India.

Rohit Jain, managing partner at Singhania & Co explained, “Section 54F applies when one sells any asset other than a house, such as gold, stocks, mutual funds, or commercial land, and reinvest the proceeds into a residential house.”

What are the conditions to apply Section 54F in your ITR filing?

If you want to claim an exemption under Section 54F, you need to file either ITR-2 or ITR-3, depending on the nature of your income. There are certain conditions under which Section 54F can be applied while filing your income tax return.

This section can only be applied “provided the net consideration from such transfer is invested, within the statutorily prescribed timelines, in the purchase or construction of a single residential house property in India,” explained Kumar.

“The provision mandates that the assessee must not own more than one residential house on the date of transfer of the original asset and must refrain from acquiring or constructing any additional residential house within the lock-in period, failing which the exemption stands withdrawn,” he added.

"The benefit of Section 54F can be claimed only by individuals and HUFs and the same is not available to companies or LLPs. The asset sold must be a "Long-Term Capital Asset" (held for more than 24 months for land/unlisted shares, or 12 months for listed shares) and not a residential house," Jain said.

The quantum of the exemption under Section 54F is directly proportionate to the extent of reinvestment of the net consideration. “The full exemption is available where the entire net consideration is reinvested and proportionate exemption where only part thereof is invested, thereby enabling a lawful and effective offset of long-term capital gains through structured reinvestment into residential real estate,” Kumar said.

The timeline of such a sale and buying of house must be also considered while filing Section 54F exemption in your ITR, Jain said.

“The net sale consideration (total sale price minus transfer expenses) must be applied to 1) purchase a house: 1 year before or 2 years after the sale; or 2) construct a house: Within 3 years after the sale. It is important to note that to claim benefit under Section 54F, the Assessee must not own more than one residential house,” he explained.