Section 54F
Section 54F of the Income Tax Act, 1961 provides an exemption from long-term capital gains tax on the transfer of any long-term capital asset other than a residential house, provided the net consideration is invested in the purchase or construction of a new residential property — with the exemption being proportional to the amount reinvested.
Section 54F is a broad exemption provision that encourages taxpayers to channel capital gains from non-residential long-term assets — such as listed or unlisted shares, mutual fund units, gold, or commercial property — into residential housing. Unlike Section 54EC which caps the exemption at ₹50 lakh, Section 54F has historically permitted exemption on the full net sale consideration if fully reinvested.
However, Budget 2023 introduced a significant cap on Section 54F: the maximum exemption was limited to ₹10 crore effective April 1, 2023 (Assessment Year 2024–25 onwards). This amendment addressed the long-standing concern that ultra-high-net-worth individuals were using Section 54F to shield very large capital gains by purchasing luxury residential properties. Under the revised provision, even if net consideration exceeds ₹10 crore, the exemption on reinvested amounts is capped at ₹10 crore.
The reinvestment conditions under Section 54F are stricter than 54EC. The new residential property must be purchased within one year before or two years after the date of transfer, or constructed within three years of the transfer. Additionally, the taxpayer must not own more than one residential house (other than the new one) on the date of transfer. Owning multiple residential properties disqualifies the claim entirely — a restriction that has been a source of extensive litigation.
If the full net sale consideration is not reinvested, the exemption is proportional. The formula is: Exemption = LTCG × (Amount invested in new property ÷ Net sale consideration). The unexempted portion of LTCG is taxable under Section 112 or 112A depending on the nature of the original asset.
The proceeds not invested at the time of filing must be deposited in the Capital Gains Account Scheme (CGAS) before the income tax return filing due date. The CGAS deposit preserves the exemption while the actual property purchase or construction is in progress. Amounts withdrawn from CGAS but not utilised for the specified purpose become taxable in the year of withdrawal.