How do I claim tax exemption under 54F?

I used the capital gains from the sale of the stocks in FY 22-23 to build my house. This is my first property. I missed claiming tax exemption on the amount I spent on construction in ITR for FY2023. Can I revise the ITR and claim exemption under 54F? I will book more capital gains this fiscal year and use them to build the same house. Can I claim exemption under 54F in the next assessment year also?

— Name withheld on request

Assume you earned long term capital gain (LTCG) on sale of stock (original asset) in fiscal 2023 and invested it in one residential house in India (new asset) which is still under construction.

For fiscal 2023, as per Section 54F of the Income Tax Act, 1961, you are entitled to claim a deduction from LTCG arising on transfer of an asset (other than a residential house), in respect of reinvestment of the LTCG. net sale consideration (other than capital gains) in respect of construction of a single residential house in India (within a period of three years from the date of transfer), subject to other prescribed conditions.

If the net consideration from the sale of the original asset is less than the cost of the new asset, then the entire LTCG on such will be exempt. If the net consideration from the sale of the original asset is more than the cost of the new asset, the LTCG will be exempted on a proportionate basis.

Assuming that all the prescribed conditions have been met in your case, however, you only failed to claim the deduction in your originally filed tax return, you can still revise your tax return within December 31 to claim the exemption as long as possible.

It may be separately noted that in Section 54F it is prescribed that, where the net consideration cannot be used in full to build the new house up to the date the return is given under section 139 of the Act, that unused amount should be deposited before the due date. of filing a tax return under section 139(1) of the Act, in a specified bank account of the Capital Gains Accounts Scheme (CGAS) with authorized banks and used in the prescribed manner, to benefit from the full deduction.

In case that amount remains unused for building a new asset, that amount will be taxable on expiry of 3 years from the date of transfer of the original asset. You may not be able to satisfy this condition for FY2022-23 now and the tax authorities may object to the same. However, there are judicial precedents that support the contention that if the house was ultimately built within the full timeline, there should be no bar to claiming the exemption under Section 54/54F.

Few judicial precedents have favorably stated that there is no bar in Section 54/54F towards claiming deduction in multiple years for the same property if the cost of the new property is within the capital gain/net consideration as applicable.

In addition, courts have also held that in the case of under-construction properties, the date of completion of construction within 3 years (rather than the commencement of construction) is relevant. Therefore, it may be considered that deduction under Section 54F may be available in fiscal 2024, for investment in the same under-construction property, provided all other conditions for claiming deduction in respect of the LTCG for fiscal 2024 are fulfilled also, although it cannot be ruled out that an objection could be made.

Parizad Sirwalla is a partner and head, global mobility services, tax, KPMG in India.

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Updated: 05 November 2023, 10:48 PM IST

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