The Income Tax Act, 1961 grants exemption of capital gains arising from the transfer of a long-term capital asset other than a house property under section 54F.
Conditions –
1. The assessee is an individual or a Hindu Undivided Family (HUF).
2. The asset transferred is any long-term capital asset but other than a residential house.
3. The assessee has purchased, within one year before the date of transfer or two years after the date of transfer or constructed within three years after the date of transfer (or from the date of receipt of compensation in the case of compulsory acquisition), a residential house (hereinafter referred to as “new house”).
4. The assessee should not sell or transfer the new house within three years of its purchase or construction.
5. The assessee should not own on the date of transfer of the original asset more than one residential house (other than the new house). He should also not purchase within a period of two years after such date or construct within a period of three years after such date any residential house whose income is taxable under the head “ Income from House property”(other than the new house).

Other relevant points to be kept in mind:
• Date of commencement of construction is not relevant.
• Allotment of flat under the self-financing scheme of the Delhi Development Authority (or under similar schemes of co-operative societies or other institutions) is treated as construction of house.

Amount of Deduction

If the above conditions are satisfied, the capital gain will be treated in a concessional manner as under:
If the cost of the new house is greater than the net consideration in respect of the capital asset transferred – Entire capital gain arising from the transfer will be exempt from tax.
If the cost of the new house is less than the net consideration in respect of the capital asset transferred – Exemption from capital gain will be granted proportionately on the basis of investment of net consideration either for purchase or construction of the residential house (i.e., Cost of new house * Capital Gains / Net Consideration).

Net consideration in respect of the transfer of a capital asset means the full value of the consideration received or accruing as a result of the transfer of the capital asset after deduction of any expenditure incurred, wholly and exclusively, in connection with the transfer.

Circumstances when exemption granted u/s 54F may be withdrawn-
• If the individual sells or transfers the new house within three years of its purchase or construction; or
• If the individual purchases, within a period of two years of the transfer of original asset, or constructs within a period of three years of transfer of such asset, a residential house other than a new house.

In the aforesaid two cases, the amount of capital gains arising from the transfer of the original asset, which was not chargeable to tax, will be deemed to be the income by way of long-term capital gains of the year in which new house is transferred or another residential house (other than a new house) is purchased or constructed, as the case may be.

Scheme of deposit in respect of Exemption u/s 54F

Where the amount of net consideration is not appropriated or utilised by the assessee for purchase or construction of the new residential house before the due date of furnishing of return of income, it shall be deposited by him on or before the due date of furnishing the return of income, in the Deposit Account in any branch (except rural branch) of a public sector bank in accordance with the Capital Gains Accounts Scheme, 1988.
The amount already utilised for the purchase or construction of the new house together with the amount so deposited shall be deemed to be the amount utilised for the purchase/construction of the new house u/s 54F.
If the amount deposited is not utilised fully for the purchase/construction of the new house within the stipulated period, the proportionate amount shall be treated as long-term capital gain of the previous year in which the period of three years from the date of transfer of the original asset expires. In such cases the assessee shall be entitled to withdraw such amount in accordance with the aforesaid scheme.

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