Exemption for investing the sale proceeds of a long-term asset in a house

The exemption (section 86, formerly section 54F)

An individual or a Hindu undivided family that sells a long-term capital asset other than a residential house (land, shares, gold, a commercial building) and invests the net consideration in one residential house in India is exempt from tax on the capital gain, wholly or in proportion to the amount invested. The provision the question names, section 54F of the Income-tax Act, 1961, is section 86 of the Income-tax Act, 2025.

Conditions

1. The assessee is an individual or a Hindu undivided family.
2. The asset transferred is a long-term capital asset other than a residential house.
3. One residential house in India is purchased within one year before or two years after the transfer, or constructed within three years after it.
4. On the date of transfer, the assessee does not own more than one residential house other than the new one (section 86(5)(a)(i)), and does not buy another house within one year, or build one within three years, after the transfer (section 86(5)(a)(ii)-(iii)), where income from that other house is taxable under the head house property.

Amount exempt (section 86(1))

Net consideration is the full value of consideration less expenses on the transfer (section 86(10)).

• If the cost of the new house is equal to or more than the net consideration, the whole capital gain is exempt.
• If it is less, the exempt part is: capital gain × cost of the new house ÷ net consideration.
• The cost of the new house is taken only up to ₹10 crore (section 86(8)).

Capital gains account scheme (section 86(2)-(4))

The amount not used for the house before the return is filed must be deposited in the capital gains account scheme before the return is filed, and in any case not later than the due date for filing it (section 86(2)(b)), with proof of the deposit submitted with the return (section 86(2)(c)); deposit plus amount already spent counts as the cost of the new house. Net consideration above ₹10 crore is ignored for the deposit (section 86(9)). If the deposit is not used within the time allowed, the exemption allowed (X) less the exemption that would have been allowed had the cost of the new house been the amount actually used (Y) is taxed as long-term capital gain of the year in which three years from the transfer end (section 86(4)(a)), and the unused amount may then be withdrawn under the scheme (section 86(4)(b)).

When the exemption is withdrawn

1. If the new house is sold within three years of its purchase or construction, the exempt gain is taxed as long-term capital gain of the year of that sale (section 86(7)).
2. If another house is bought within two years or built within three years after the transfer, the exempt gain is taxed as long-term capital gain of that year (section 86(6)).

Illustration (our own)

Ms. Sethi sells land held for six years for ₹60,00,000, paying ₹60,000 brokerage; the long-term capital gain is ₹24,00,000. She buys a flat for ₹44,55,000. Net consideration = ₹59,40,000; exempt part = ₹24,00,000 × ₹44,55,000 ÷ ₹59,40,000 = ₹18,00,000; taxable capital gain = ₹6,00,000.