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On January 31, 2018, Finance Minister Arun Jaitley turned the clock back 14 years and re-introduced long-term capital gains (LTCG) tax on listed equity shares and equity-oriented mutual funds. The stock market turned volatile and people started unloading their positions to escape tax before March 31. For small investors, an exemption of up to ₹1 lakh was given on LTCG from the sale of equity shares and equity-oriented mutual fund units. By using Section 54F, you can save tax on LTCG.
What and how
Section 54F allows you to utilise the profit that you have made from a long-term capital asset to buy a house. There are some conditions that must be fulfilled while buying the house, to be eligible for exemption under Section 54F. While shares and mutual funds are also capital assets, LTCG from sale of these assets could not be used to claim 54F benefit earlier, since these long-term gains were not taxed then.
“That’s not how it (Sec 54F) is typically used because of the set-off option available. But there is nothing in the law that stops you,” says Archit Gupta, founder and chief executive officer ClearTax. “Typically, people who have over ₹1 lakh worth of capital gains, prefer to set off any loss first. But if you are looking at ₹40-50 lakh worth of gains then it makes sense to use 54F.”
In case you have more than ₹1 lakh in LTCG in a particular financial year and haven’t exhausted any long-term loss from selling shares and equity mutual funds, and have plans to buy a house, Section 54F makes sense. That’s because the Section refers to ‘any’ long-term capital asset.
Nitty gritties
There are many conditions under Section 54F relating to when the house should be purchased or constructed.
Earlier, if you sold assets such as land or jewellery and used the proceeds to buy a house, the stipulated time period to use the proceeds is either one year before the sale of the asset or two years after the sale, or constructed a house within three years from the date of sale.
The date of purchase usually means the date when you sign the purchase agreement. Now, the same is applicable for LTCG from shares and equity mutual fund units sold.
If you have ploughed back all the money you made from the sale of shares or mutual funds to either buy a house or construct one, you can claim deduction on LTCG under Section 54F.
For example, if you made ₹20 lakh LTCG on the sale of shares and/or equity mutual fund units worth ₹60 lakh. And you used ₹60 lakh to buy a new house worth ₹1 crore, you can claim exemption of the whole ₹20 lakh under Section 54F of the Income Tax Act. In case the cost of the house is ₹50 lakh, the LTCG exemption will be calculated using the formula:
Total LTCG x [cost of new house/net consideration]
In our example, the exemption would be ₹20 lakh x [₹50 lakh/₹ 60 lakhs], that is, ₹16,66,667.
Remember, this benefit is available to an individual and a Hindu Undivided Family only if they don’t have any other house which is chargeable to tax under the head ‘income from house property’ under the Income Tax Act.
You can also use the capital gains account scheme to park your money in case you have not used the money before you filed your income tax return. But if you have not used this amount within the stipulated time period, the unused LTCG will be chargeable to tax.
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