Income tax laws allow individuals to save tax on LTCG from equity shares and equity mutual funds provided the capital gains are used to buy a residential property. Here’s how.
Save LTCG tax on sale of equity by buying a house
Yogesh Kale, Executive Director, Nangia Andersen India, says, “Section 54F of the Income-tax Act, 1961, allows individuals and Hindu undivided families (HUFs) to save tax on LTCG arising from the sale of any capital assets other than a residential house property. The tax on LTCG can be saved by investing the long-term capital gains by purchasing or constructing a residential house within the prescribed time and subject to certain conditions.”
Section 54F allows tax savings on long-term capital gains from any capital asset other than a residential house. However, if the LTCG arises from the sale of a residential house, then tax exemption can be claimed under a different section of the Income-tax Act – Section 54. The rules to claim tax exemption under Section 54 are different from those under Section 54F.
Suresh Surana, a practising chartered accountant, says, “A capital asset under Section 54F includes any long -term capital asset (other than a residential house) that can have long-term capital gains on its transfer. These include equity shares, equity mutual funds, gold jewellery, unlisted shares, international equity shares, paintings, commercial buildings, etc. However, capital gains arising from sale of debt mutual funds, international equity mutual funds, gold mutual funds and gold ETFs acquired on or after April 1, 2023, and sold on or before March 31, 2025, are termed short term as per the provisions of section 50AA of the IT Act. Hence, one cannot claim Section 54F tax exemption on these.”
Also Read: Income tax laws for capital gains on gold have changed
Maximum amount of tax exemption under Section 54F
The maximum amount of LTCG that can be claimed as exempt from tax under Section 54F depends on the amount used to purchase or construct the house. Kale says, “The tax exemption that can be claimed under Section 54F depends on the cost of the residential house.”
He explains this with two scenarios:
a) If the cost of buying or constructing the residential house is more than the net sale value received from the sale of any capital asset (other than the residential house), then all the LTCG amount is exempt from tax. To put it another way, if an individual invested the entire sale proceeds of equity shares in purchasing a property, then the entire LTCG on the sale would be exempt from tax.
Here is an example to understand this. Suppose you get Rs 50 lakh by selling equity shares and use this entire money plus other finances to buy a house for Rs 1 crore. Assume that the capital gains amount here is, say, Rs 30 lakh. As the cost of the house is more than the sale value of equity shares (i.e., the entire sale proceeds of equity shares have been invested in buying the house), the entire capital gains amount of Rs 30 lakh will be exempt from LTCG tax.
b) If the cost of buying or constructing the house is less than the net sale value of the capital asset (such as equity shares) sold, then the percentage of the capital gains exempt from tax would be equal to the percentage of the cost of the new house financed from the sale proceeds. To put it in other words: the proportion of capital gains exempt from tax would be equal to proportionate amount = (amount of capital gain x cost of new house)/sale value of capital asset.
Here is an example of how proportionate capital gains will be calculated. Suppose you get Rs 75 lakh by selling equity shares and buy a house for Rs 60 lakh. The LTCG from the sale of equity shares is Rs 40 lakh. As the house cost is less than the sale value of equity shares, the proportionate amount of LTCG will be exempted from tax. It will be calculated as follows: Rs 40 lakh X Rs 60 lakh/ Rs 75 lakh = Rs 32 lakh. LTCG of Rs 32 lakh will be exempted from tax. The balance Rs 8 lakh will be taxable at the LTCG tax rate of 12.5%. Further, an individual can claim an LTCG tax exemption of Rs 1.25 lakh from taxable LTCG as per current tax laws.
However, in both cases, maximum amount of LTCG claimed exempt from tax cannot exceed Rs 10 crore in a financial year, adds Kale.
Surana says, “Net sale value is the amount received from the sale of the capital asset (such as equity) after deducting any expenses related to the sale.”
Claiming Section 54F tax exemption
A residential house must be bought to claim an exemption under Section 54F to save tax on LTCG from equity or any other capital asset.
Surana says, “To claim the Section 54F tax exemption, the taxpayer must invest the net sale consideration in purchase or construction of one residential house before the due date of filing ITR for the year in which the LTCG from the capital asset is taxable. However, if the same is not used to buy the new house before the due date to file ITR, the taxpayer must deposit the net sale consideration amount in the Capital Gain Account Scheme if the taxpayer wants to avoid paying the capital gains tax. In essence, depositing the sale proceeds in the Capital Gain Account Scheme is a temporary measure to be able to use the proceeds for buying the house, as per conditions specified, to claim the exemption.”
Suppose you sold equity shares worth Rs 1 crore in May 2024. The LTCG on equity shares can be taxable if the house is not bought or constructed within the specified period. To avoid paying taxes, Rs 1 crore must be deposited in the Capital Gain Account Scheme before the due date of filing ITR i.e., July 31, 2025. This will help to avoid paying taxes on LTCG on equity till the specified time period expires to purchase or construct the house.
Conditions to claim Section 54F tax exemption
Surana points out that Section 54F allows a tax exemption only for purchase or construction of one house property from the sale of equity shares, equity mutual funds, or any other capital asset. “Further, the house has to be bought either within one year before the date of sale of capital assets (such as equity) or within two years after the date of sale. If the house is being constructed, then construction must be completed within three years from the date of sale,” he adds.
A taxpayer must also satisfy other conditions to claim exemption of LTCG under Section 54F of the Income-tax Act.
Surana explains the two conditions that a taxpayer must satisfy to claim a deduction:
a) Lock-in period: There is a lock-in period of three years on the sale of the newly bought or constructed house. The taxpayer should not sell the house before the completion of three years from the date of construction or purchase. If the house is sold within three years, the exempted LTCG will be subject to income tax.
b) Not owning more than one residential house: The taxpayer should not own more than one residential house (other than the new residential house) on the date of sale of the capital asset (such as equity) for which exemption from LTCG tax is claimed.
When tax exemption under Section 54F cannot be claimed
An individual cannot claim a deduction under Section 54F under the following circumstances:
a) If the taxpayer owns more than one residential house on the date of sale of a capital asset for which exemption of LTCG tax under Section 54F is being claimed
b) If a taxpayer has purchased any residential house property, other than the one purchased for claiming exemption under Section 54F, within one year from the sale of the capital asset for which exemption from LTCG tax is being claimed
c) If a taxpayer constructs a residential house, other than the one constructed for claiming exemption under Section 54F, within three years from the date of sale of the capital asset for which exemption is being claimed.
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