That opened up a bit of a rabbit-hole for me, and we tackled Section 54 and Section 54EC of the Income Tax Act first. If you’d missed them, check out those editions, because both have very useful tax-saving provisions if you are ever in a position to sell residential property.
from April 2018, if the LTCG from selling such equity shares and equity mutual funds exceeded Rs 1 lakh a year, it’s being taxed at 10%
Section 54F takes it to a whole different realm—because it helps you avoid tax on LTCG from capital assets other than a residential property
So gold, jewellery, bonds, equity shares, equity mutual funds—all fair game. If you invest the proceeds of selling such assets in a residential house, Section 54F gives you a tax break.
The tax break is not available if you already own more than one house (other than the house you plan to invest in)
The tax break depends on how much of the sales proceeds you invest in the house. Say, you sold equity shares for Rs 50 lakh and made LTCG of Rs 10 lakh. If you invest the entire Rs 50 lakh in the new house, the whole Rs 10 lakh LTCG will not be taxed. But if you invest a lesser amount, say Rs 40 lakh, in the new house, then the tax break will apply proportionately—i.e., to Rs 8 lakh.
You have to buy a house within a year before the sale or within two years after the sale. And if you plan to construct a new house with the money, you get three years after the sale before your time runs out.
But what if you haven’t homed in on a house to reinvest in?
No problem.
Just park the money in a special Capital Gains Accounts Scheme (CGAS) account, which many banks provide. This needs to be done before the due date for filing tax returns, for the year in which the sale was made. Otherwise, the gains become taxable.
You also need to use the money from the CGAS to buy (or construct) a house within the specified timelines.
And once you reinvest in the new house, you need to hold it for at least three more years.
If you buy or construct another house (other than the one for the Section 54F benefit) within one or three years, respectively, from the sale of the asset, then the Section 54F tax break given earlier will be reversed.
