Income Tax Latest Update: Many taxpayers want to know whether long-term capital gains (LTCG) earned from selling equity mutual funds can be exempted under Section 54 or Section 54F of the Income Tax Act if the money is used to purchase a residential property. The law allows individuals and Hindu Undivided Families (HUF) to claim tax exemption on long-term capital gains arising from certain assets, provided the amount is invested within a defined time frame.
A reader from Noida, Sujit Garg, raised a similar query. He sold all his equity mutual fund units and earned ₹25 lakh long-term capital gains, which he later used to buy a flat costing ₹2 crore. He wants to know whether he is eligible for tax exemption on LTCG under Section 54 or Section 54F. To clarify, Moneycontrol consulted well-known tax expert Balwant Jain, who explained the applicable rules.
Understanding Section 54 and Section 54F
Both provisions come under the Income Tax Act and provide tax relief on long-term capital gains, but they apply to different types of assets.
Section 54 – Exemption on Sale of Residential Property
According to Section 54, if a taxpayer sells a residential house property and invests the long-term capital gains from that sale into another residential property within the specified time, they can claim exemption on the capital gain amount.
Conditions for Section 54 exemption include:
The property sold must be a residential property.
The taxpayer must purchase another residential house within one year before or two years after the sale, or construct a house within three years from the sale.
The exemption is limited to the amount of capital gain or the amount invested, whichever is lower.
Since Sujit Garg sold mutual fund units instead of a residential property, Section 54 does not apply in his case.
Section 54F – Exemption on Sale of Any Long-Term Capital Asset
Section 54F applies when a taxpayer sells any long-term capital asset other than a house—such as equity mutual funds, gold, land, or bonds—and uses the amount to buy a residential property.
Key conditions under Section 54F:
The capital gain must arise from selling a long-term capital asset other than a residential house.
The taxpayer must invest the sale proceeds in one residential house property within the specified time frame.
On the date of selling the original asset, the taxpayer must not own more than one residential house.
If the taxpayer sells the newly purchased property within three years, the exemption is withdrawn (reversed).
Will Sujit Garg Get Tax Exemption?
Tax expert Balwant Jain clarified that since Garg sold equity mutual fund units (which are considered capital assets) and used the proceeds to purchase his first residential property, he is eligible to claim tax exemption under Section 54F.
However, some important points must be noted:
✔ Exemption is available only if:
He did not own more than one residential house on the date of selling mutual funds.
He does not buy another residential property within one year, or construct one within three years, after the purchase.
He does not sell the newly purchased flat within three years.
✘ Exemption gets reversed if:
The flat is sold within three years.
Another residential house is purchased or constructed within the restricted period.
Conclusion
Yes, it is possible to claim long-term capital gains tax exemption when using mutual fund sale proceeds to buy a flat—but only through Section 54F, not Section 54. The exemption is subject to several conditions, and failure to comply may lead to reversal of the benefit.
Disclaimer
The information provided here is meant for educational purposes only. Investments and tax planning involve risk and should always be done after consulting a qualified financial advisor or tax expert.
