As per the provisions of section 45 of the Income Tax Act the profit arising out of the transfer of capital assets in the previous year is chargeable to income tax under the head “capital gains”.
Generally two kinds of capital gains are taxed under section 45 of the Income Tax Act:
1. Short term capital gain;
2. Long term capital gain.
Section 54F of the Income Tax Act:
The Income Tax Act provides that some deductions can be directly claimed in connection with capital gains. Section 54F read with section 54 provides that the investment which if is made and the stipulated conditions are followed, the long term capital gain are not taxed in the hands of the assessee.
These provisions are applicable to all assessees both individuals and Hindu undivided families. The deductions under both the sections can be availed in respect of the long term capital gain arising out of the transfer of capital assets.
Section 54 of the Income Tax Act:
Section 54 is applicable only to capital gain arising out of the transfer of long term capital assets such as buildings, the income of which is taxed under the head “income from house property”.
On the other hand, section 54F is applicable to the capital gain arising out of the transfer of any long term capital asset other than a residential house.
Conditions for availing deduction under section 54 and 54F:
As per section 54 and 54F can be availed only if the following conditions are applied –
1. The assessee purchases a residential house before the expiry of one year from the transfer;
2. The assessee makes construction of a residential house within three years of the transfer.
In other words we may say that for availing such kinds of deduction an assessee should invest his capital gain in his residential house.
However an assessee shall not be entitled to claim deduction under section 54F if he is already the owner of more than one residential house other than the new one on the date of transfer of the old asset.
For the purpose of section 54F the assessee should retain the new residential house for succeeding 3 years from the date he acquires the same. If he fails to do so, the deduction claimed shall be taxed under section 45 of the Act accordingly.
Difference between sections 54 & 54F:
Section 54 of the Act deals with property such as building which is a residential house but section 54F deals with property other than a residential house. But both the sections refer to purchase or construction of “a new house”.
The Gujarat High Court in the case of CIT vs. Chandanban Maganlal, (2000) 245 ITR 182, has held that income tax exemption is allowed even if an assessee purchases a share in a new property.