If an individual transfers any long term capital asset and plans to reinvest the sale proceeds in a new residential house property then he is eligible to claim exemption u/s 54 and 54F to reduce his tax liability.

Section 54

As per Section 54 of the Income Tax Act, 1961 the capital gain arises from the transfer of a long-term capital asset (being buildings or  lands appurtenant thereto,) and being a residential house, the income of which is chargeable under the head “Income from house property” shall be exempt to the extent such capital gain is invested in the purchase of another residential House Property and according to section 54F, any long-term capital gain, arising to an individual or HUF, from the transfer of any capital assets, other than residential house property, shall be exempt in full, if the entire net sales consideration is invested in purchase of one residential house.

Please refer to the following article for more info on Exemption U/S 54

Section 54F

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).

Please refer to the following article for more info on Exemption U/S 54F

No Restriction on location of the New House Property

An interesting thing to note about both the Exemptions u/s 54 & 54F are that there are no restrictions in regard to the location of the new house property. There are no provisions in both the sections which say that the new house property should be located in India. Thus if an individual or an HUF sells any Long term capital asset to purchase a new house property outside India, he can still claim exemption u/s 54 (sale of a residential house property) and u/s 54F (sale of any long term capital asset other than a residential house property.

Exemption is independent of the Residential Status

Both the above sections restrict the exemption to an individual or an HUF. But the sections do not decline the exemption on the basis of the residential status. Thus an NRI, residing outside India and having foreign income, can also claim exemption u/s 54 and 54F on the sale proceeds arising from the sale of any long term capital asset in India.

Refund Claim

He can also claim refund if he has paid taxes on the capital gains arising on sale of long term capital asset by claiming exemption u/s 54 and 54F while filing the income tax return. After making the re-investment in a new residential house property outside India he can still claim exemption by filing his return within the due date.

Case Law

As in the case of Mrs. Prema Shah v/s ITO (2006) 100 ITD 60 (TMum) it was held that if an individual sells any long term capital asset to reinvest the sale proceeds on a new house property purchased or constructed outside India, he can still enjoy the benefits of exemption u/s 54 & 54F. The Tribunal held that –

“In short, we are of the considered view, for the reasons stated hereinabove, the assessee is entitled to the benefit under section 54 of the Act. It does not exclude the right of the assessee to claim the property purchased in a foreign country, if all other conditions laid down in the section are satisfied, merely because the property acquired is in a foreign country.”

Thus, an individual or an HUF can avail the benefits of exemptions u/s 54 & 54F, irrespective of its residential status without any restriction in regard to the location of the new house property.