54F Taxation Rules
Selling your mutual funds to buy your first house may allow you to claim long-term capital gains (LTCG) exemption under Section 54F of the Income Tax Act. Today’s Ask Wallet Wise query decodes how tax rules apply when you reinvest your proceeds in a residential property.
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In this financial year, I sold all my equity mutual funds and purchased a flat in Mumbai. This is my first house property and I do not own any other. I have a long-term capital gain of Rs 25 lakh and the flat I purchased costs around Rs 2 crore. Can I claim LTCG benefits under Section 54 or Section 54F?
Expert’s Advice: Income-tax laws allow an individual or a Hindu Undivided Family (HUF) to claim exemption from long-term capital gains if the investment is made in a residential house within the prescribed time period. Section 54 provides exemption from LTCG arising from the sale/transfer of a residential house property if such gains are reinvested in another residential house within the prescribed timeline.
Section 54F, on the other hand, provides exemption for LTCG arising from the sale/transfer of a capital asset other than a residential house property, provided the net sale proceeds are invested in a residential house within the prescribed time period, and the taxpayer does not own more than one residential house property on the date of sale of the original asset.
Since this is your first residential house, you are eligible to claim exemption under Section 54F. The exemption will be reversed if you transfer this house property within three years, or if you buy another residential house within one year from the date of sale of the original capital asset, or if you construct another residential house within three years.
As your capital gains have arisen from the sale of assets other than a residential house (i.e., equity mutual funds), you can claim exemption under Section 54F if you invest the net sale proceeds of these mutual funds. Equity mutual funds qualify as long-term capital assets if they have been held for more than 12 months.
Since you have already purchased a residential house in the same financial year, you are eligible to claim exemption under Section 54F but only in respect of the gains from equity mutual funds that were held for more than 12 months. For gains arising from redemption of equity schemes that had not completed 12 months, you will have to pay tax at 20 percent if you opt for the new tax regime and your other income exceeds Rs 4 lakh.
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If you opt for the old tax regime, you will be eligible for a rebate under Section 87A if your total income (excluding the long-term capital gains for which you are claiming exemption under Section 54F) does not exceed Rs 5 lakh.
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