LTCG: The Tax Trap Between Sections 54 and 54F.

The core rule is: What you sold determines how much you must reinvest to avoid tax.

Also Read |8th CPC: Finance Ministry Confirms Pension Revision is Included.

1. Section 54: You Sold a House

This is the most generous section. It applies only when you sell a residential house you held for more than two years.

• What to Reinvest: You only need to reinvest the Capital Gain amount.

  • Example: If your gain is ₹40 lakh, and the new house costs ₹45 lakh (more than the gain), the full ₹40 lakh is exempt. If the new house costs ₹35 lakh (less than the gain), only ₹35 lakh is exempt. The leftover ₹5 lakh is taxable.

• The Big Concessions:

  • Two Houses: If your capital gain is ₹2 crore or less, you get a one-time option to invest in two residential houses, not just one.

  • Maximum Cap: The maximum exemption is now capped at a ₹10 crore investment in the new asset, put in place by the Finance Act, 2023.

2. Section 54F: You Sold Anything Else

This is for long-term gains from selling assets other than a residential house. Think land, gold, mutual funds, commercial property, shares—anything that generated LTCG.

• What to Reinvest: You must reinvest the Entire Sale Consideration (the full sale amount) for a full exemption. This is the stringent rule.

  • Example: Raj sells equity mutual funds for ₹60 lakh, and his gain is ₹40 lakh. If he only reinvests ₹30 lakh (part of the sale proceeds) in a house, the exemption is calculated proportionately:Also Read |8th CPC: Finance Ministry Confirms Pension Revision is Included.
    Exemption = Capital Gain \times \frac{Amount Reinvested}{Net Sale Consideration}$$
    Exemption = ₹40 lakh ₹30 lakh ₹60lakk = ₹20 lakh

     

    The remaining ₹20 lakh is taxable. He has to put the full ₹60 lakh in to make the gain zero.

• The Key Restriction: You must not own more than one residential house (besides the new one) on the date you sell the original asset. If you already own two homes, 54F is off the table.

Also Read |8th CPC: Finance Ministry Confirms Pension Revision is Included.

3. The Time Limits (Common Ground)

Both sections share the same critical timeline for reinvestment:

4. The Short-Term Trap

Here’s the kicker: both sections have a common lock-in. If you sell that newly purchased or constructed house within three years, the tax exemption you claimed earlier gets reversed. The tax you saved becomes immediately taxable in the year you sell the new house. That rule prevents you from using these provisions as a short-term parking arrangement.

The nature of the asset sold decides which section applies, but your planning decides how much you save. The stakes are huge.

Also Read |8th CPC: Finance Ministry Confirms Pension Revision is Included.

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