Can capital gains exemptions be claimed for the same house under both Section 54 and Section 54F of the Income Tax Act?

Tax benefits under section 54 and 54F

Selling a house and some mutual funds but planning to invest both proceeds in one new home to claim tax benefits? Today's Ask Wallet Wise decodes how you can legally claim capital gains exemptions under both Section 54 and Section 54F for the same property.

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I have sold a residential property for Rs 95 lakh in the current financial year and have made a long-term capital gain. I am planning to buy another residential property costing Rs 2.35 crore. To fund the new property, I am also selling some of my equity mutual funds, which will generate long-term capital gains.

My query is: Can I claim a capital gains exemption under Section 54F for the long-term capital gains arising from such mutual fund units, simultaneously with Section 54 exemption for the capital gains from the sale of the residential property, for the same house that I am planning to purchase?

Expert’s view: Section 54 allows exemption to an individual or a Hindu Undivided Family (HUF) in respect of long-term capital gains arising from the sale of a residential house held for more than two years, if the capital gains are invested in another residential house within the prescribed time period.

Likewise, Section 54F provides a similar exemption for long-term capital gains arising from the sale of any capital asset other than a residential house property (for instance, equity mutual funds). The exemption applies if the net sale proceeds from such asset(s) are invested in a residential house property within the same time frame as prescribed under Section 54. However, Section 54F specifies that the exemption cannot be claimed if the taxpayer owns more than one residential house property (other than the one being purchased) on the date of sale of the capital asset.

Both sections require the investment to be made in a residential house property in India. Importantly, there is no explicit restriction in the Income Tax Act that prohibits claiming exemptions under both sections in respect of the same residential house. The two sections are independent provisions, addressing distinct sources of capital gains - one from the sale of a residential house (Section 54) and the other from non-residential assets (Section 54F).

In other words, there is no statutory provision that prevents a taxpayer from claiming both exemptions (“double-dipping”) for the same property, provided all prescribed conditions -relating to the investment amount and time limit - are duly satisfied. The key requirement is that the cost of the new residential property should be sufficient to cover the exemptions claimed under both sections separately.

Let’s understand this with an example:

Sale of residential house:

Long-term capital gain: Rs 40 lakh. Exemption claimed under Section 54 by investing Rs 40 lakh in the new house

Sale of land or equity mutual funds: Sale consideration: Rs 80 lakh.  Long-term capital gain: Rs 30 lakh. Exemption claimed under Section 54F by investing the entire Rs 80 lakh in the same new house.

In this case, the assessee invests a total of Rs 1.20 crore (Rs 40 lakh + Rs 80 lakh) in the new residential property and can claim exemptions for Rs 70 lakh of long-term capital gains under both sections simultaneously.

Since neither Section 54 nor Section 54F restricts the taxpayer from claiming both exemptions for the same residential property - provided the respective investment conditions and timelines are met  - it is permissible to claim both exemptions together for the same house.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

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