Capital Gains Exemption under Sections 54 and 54F – Practical Checklist

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Capital gains exemption under section 54 and 54F is available only when statutory conditions relating to timelines, asset type and reinvestment are strictly complied with. Capital gains exemption under sections 54 and 54F is one of the most frequently claimed but equally frequently denied tax benefits under the Income-tax Act, 1961. While these provisions offer substantial relief from long-term capital gains tax, the exemption is available only if statutory conditions are strictly complied with.

This article explains the eligibility conditions, timelines, investment rules, Capital Gains Account Scheme (CGAS), common pitfalls, and a practical checklist to ensure that exemption under sections 54 and 54F is not denied.

Understanding Sections 54 and 54F – Basic Difference

Before claiming exemption, it is critical to understand which section applies.

Section 54 – Sale of Residential House

Applies when:

  • The original asset is a residential house property
  • The assessee invests in one residential house property

Section 54F – Sale of Any Long-Term Capital Asset

Applies when:

  • The original asset is not a residential house (e.g., land, shares)
  • Net consideration is invested in one residential house
  • The assessee does not own more than one residential house on the date of transfer

Eligibility Conditions – Non-Negotiable Requirements

Common Conditions

  • Capital gain must be long-term
  • Investment must be in one residential house property
  • Property must be situated in India
  • Exemption is available only to individuals and HUFs

Additional Conditions for Section 54F

  • Assessee should not:
    • Own more than one residential house (other than the new one)
    • Purchase another residential house within 2 years
    • Construct another residential house within 3 years

Time Limits for Investment (Critical)

Missing timelines is the number one reason for denial.

Purchase of New House

  • Within 1 year before the date of transfer, or
  • Within 2 years after the date of transfer

Construction of New House

  • Within 3 years from the date of transfer

Courts have consistently held that substantial compliance is sufficient, but delays beyond statutory limits are fatal.

Amount of Exemption – How It Is Computed

Under Section 54

Exemption = Lower of:

  • Capital gains, or
  • Amount invested in the new residential house

Under Section 54F

Exemption is proportionate:

Capital Gain × (Amount Invested ÷ Net Sale Consideration)

If full net consideration is not invested, partial exemption applies.

Capital Gains Account Scheme (CGAS) – When and Why

If the capital gain or net consideration is not fully utilised before the due date of filing return u/s 139(1), the unutilised amount must be deposited in the Capital Gains Account Scheme (CGAS).

Key Points

  • Deposit must be made before due date u/s 139(1)
  • Mere intention to invest is not sufficient
  • Deposit can be withdrawn only for specified purposes
  • Unutilised amount becomes taxable after the prescribed period

Failure to use CGAS correctly leads to automatic denial of exemption.

Ownership and Name Issues – Commonly Litigated

Courts have taken a liberal view in genuine cases, but risks remain.

Accepted in Many Cases

  • New house purchased in joint name (with spouse)
  • Assessee is the real investor
  • Payment made from assessee’s funds

Risky Situations

  • Property purchased entirely in another person’s name
  • Funds routed through unrelated parties
  • Lack of documentary evidence

Common Reasons for Denial of Exemption

Based on litigation trends, exemptions are denied mainly due to:

  • Delay in investment beyond statutory period
  • Failure to deposit in CGAS
  • Purchase of more than one residential house
  • Ownership of multiple houses (for section 54F)
  • Incomplete documentation
  • Incorrect claim in return of income

Most denials are procedural, not substantive.

Practical Checklist – Before Claiming Exemption

Use this checklist before filing the return:

Transaction Review

  • Date of sale deed
  • Nature of original asset
  • Long-term capital gain computation

Investment Compliance

  • Date of purchase / construction agreement
  • Amount invested
  • Mode of payment
  • Builder / seller documents

CGAS Compliance (if applicable)

  • Deposit date
  • Account number
  • Proof of deposit

Documentation

  • Sale deed (old and new)
  • Bank statements
  • Capital gains working
  • CGAS passbook
  • ITR schedules correctly filled

Important Judicial Principles (In Brief)

Courts have repeatedly held that:

  • Beneficial provisions must be liberally construed
  • Delay by builder cannot be held against assessee
  • Completion certificate is not mandatory if investment is made
  • Substance prevails over form in genuine cases

However, statutory timelines cannot be ignored.

Conclusion

Capital gains exemption under sections 54 and 54F is highly beneficial but highly conditional. Most disputes arise due to ignorance of timelines, CGAS requirements, or documentation gaps.

A disciplined, checklist-based approach ensures:

  • Full exemption
  • No litigation
  • Smooth assessment

For high-value transactions, advance planning before sale is strongly recommended.

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