How exemption under Section 54F for long-term capital gains on the sale of a plot of land is computed? | Mint

I have sold a plot of land for ₹67 lakh. After indexation, the taxable long-term capital is around Rs35.40 Lakh. If I invest the long-term capital gains of Rs35.40 lakh in a residential flat, I understand that I do not have to pay any tax due to the exemption available under Section 54F. If the amount of investment in the flat is 25 lakh instead of ₹35.40 lakh, what would be the quantum of exemption available in this case? I have utilized part of the sale proceeds from the plot. I have taken a home loan to make up for part of the flat cost. Now, if I prepay part of the home loan from my source within one year of the sale of the plot, can I claim the benefit of exemption under Section 54F in respect of such prepayment?

Since you have sold a plot of land and not a residential house, you can claim an exemption from long-term capital gains under Section 54F and not under Section 54. Section 54F requires you to invest the net sale consideration in a residential house to avail the exemption from long-term capital gains. In contrast, section 54, which applies to long-term capital gains on the sale of a residential house, requires investment only of long-term capital gains. Since the indexation benefit has been removed to compute the amount to be invested for claiming exemption, even under Section 54, one has to invest in unindexed long-term capital gains.

Understanding Long-Term Capital Gains Exemption: Key Differences Between Section 54F and Section 54 for Land Sale

The provisions of Sec. 54F and Sec. 54 are largely similar but with one significant difference. Under Section 54F, the net sale proceeds must be invested in the new residential house property. So, in your case, the entire ₹67 lakh will have to be invested in the new flat for 100% complete exemption. If you do not invest the whole of the net sale consideration, the exemption amount under Section 54F shall be reduced proportionately.

In addition to investing in a residential house, you can also save taxes by investing the unindexed long-term capital gain amount (and not the sale proceeds) in capital gains tax-saving bonds u/s 54EC.

In case you do not avail of the full exemption, you will have to pay tax on the taxable long-term capital gains at a lower of 12.50% on unindexed long-term capital gains or @ 20% on indexed capital gains as the land was purchased before 23 rd July 2023.

Please note that for claiming exemption under Sections 54 and 54F, it is not necessary to establish a one-to-one correspondence between the funds from the sale of capital assets and their utilisation to purchase a new residential house. You are free to use whole or part of the sale proceeds anywhere else and purchase the new residential house property by borrowing money.

The exemption is available as long as the new flat is purchased within the time prescribed. Please note that the law does not allow any exemption from tax payment on long-term capital gains regarding repayment of home loans besides the regular deduction available under section 80C for repayment of home loans under the old tax regime.

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Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on social media platform X (formerly Twitter)