Many taxpayers earn long-term capital gains (LTCG) from selling equity or debt mutual funds. A common question arises: Can these gains be exempted from tax if used to purchase a residential property? The answer depends on Section 54 and Section 54F of the Income Tax Act, 1961.
1. Understanding the Sections
Section 54 – Exemption on Sale of house Property
· Applicability: When you sell a residential property (house or flat).
· Exemption: LTCG from the sale of the house can be exempted if you buy another residential property within a specified period (usually 1 year before or 2 years after the sale, or 3 years for construction).
· Important: Section 54 does not cover mutual fund gains, only gains from selling property.
Section 54F – Exemption on capital Gains From Other Assets
· Applicability: When you sell any long-term capital asset other than a house (e.g., land, equity mutual funds).
· Exemption: LTCG can be exempted if the entire sale proceeds (not just gains) are used to buy or construct a residential property within the specified period.
· Key Conditions:
1. You should not own more than one residential property on the date of sale of the original asset.
2. Entire net sale proceeds must be invested in the new residential property to claim full exemption. Partial investment results in partial exemption.
2. How This Applies to Mutual Fund Gains
· Gains from selling equity mutual funds or other capital assets fall under Section 54F, not Section 54.
· If you use the sale proceeds (or capital gains) to buy a new residential flat, you can claim exemption under Section 54F.
· Ensure that you meet the conditions regarding ownership of other properties and time frame to avoid rejection by the Income Tax Department.
3. Practical Example
· Suppose you sold mutual fund units worth ₹10 lakh and earned an LTCG of ₹2 lakh.
· You buy a new flat using the full ₹10 lakh within the allowed period.
· You can claim full exemption of ₹2 lakh LTCG under Section 54F.
4. Important Points to Remember
· Time Period: The new property must be purchased within 1 year before or 2 years after sale, or constructed within 3 years.
· Ownership Limit: Must not own more than one residential property at the time of sale.
· Documentation: Keep sale receipts, mutual fund redemption proof, and property purchase documents for income tax filing.
· Tax Planning: Section 54F is an effective tool for tax planning if you plan to invest mutual fund gains in real estate.
Conclusion:
While Section 54 is for gains from selling a house, Section 54F applies to mutual fund gains or other long-term capital assets. By investing the entire sale proceeds in a new residential flat, taxpayers can legally claim exemption from LTCG tax, ensuring efficient tax planning and savings.
Disclaimer:
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk..jpg)
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