Section 54F of ITA, 1961 : Section 54F: Capital Gain On Transfer Of Certain Capital Assets Not To Be Charged In Case Of Investment In Residential House

Explanation using Example

Imagine Mr. Sharma sold a plot of land, which is a long-term capital asset, for a net consideration of ₹50 lakhs. With this money, he wants to invest in a residential house to save on capital gains tax. If within two years after selling the land, he purchases a new residential house for ₹50 lakhs or more, he can claim exemption on the entire capital gain under Section 54F of the Income Tax Act, 1961.

However, if Mr. Sharma only spends ₹30 lakhs on the new house, the exemption will be proportionate. That is, only the part of the capital gains that ₹30 lakhs represents of the ₹50 lakhs (the net consideration) will be exempt. So, if the capital gain is ₹20 lakhs, then ₹12 lakhs (20 lakhs * 30/50) will be exempt from tax, and the remaining ₹8 lakhs will be taxable.

Furthermore, if Mr. Sharma already owns more than one residential house at the time of the sale or buys another house within a year or constructs one within three years, the exemption under Section 54F would not apply.

Lastly, if Mr. Sharma doesn't utilize the entire sale proceeds to buy or construct a new house before filing his income tax return, he must deposit the unutilized amount into a specified bank account to still claim the exemption. If he fails to utilize this deposited amount within the specified time, it will be taxed as capital gains.