Want to save on long-term capital gains tax when selling mutual funds, shares, or property? Sections 54 and 54F of the Income Tax Act offer some great opportunities. Learn how, with proper planning, you can reduce your tax burden and take advantage of both these provisions.
If you’re thinking of selling mutual funds, shares, land, or property and want to avoid long-term capital gains (LTCG) tax, the Income Tax Act offers certain exemptions. Specifically, Sections 54 and 54F can help you avoid tax. However, both have certain conditions and regulations that can be difficult to understand.
Section 54F: Exemption on Non-Residential Property
Section 54F of the Income Tax Act applies to assets that are not homes, such as gold, land, or equity mutual funds. If you use the proceeds from selling these assets to purchase a new home, you may be exempt from LTCG tax, but there is one important condition: You must own only one residential home on the day you sell the property.
If you sell your equity mutual fund in fiscal year 2025-26 and use the proceeds to buy a new home, you’ll be eligible for a deduction, provided you own only one home at that time.
You can purchase a new home one year before or two years after the sale, or build it within three years.
If you don’t invest the entire sale proceeds, you’ll be eligible for a deduction based on the amount invested. However, if you already own two homes, you won’t be eligible for this deduction.
Section 54: Exemption on Sale of Residential Property
Section 54 of the Income Tax Act applies when you sell a house and invest the LTCG earned on it in a new house. Unlike Section 54F, there are no restrictions on how many houses you already own. This means that even if you own multiple houses, you can still claim the exemption by purchasing a new house, provided you adhere to the time limits.
If all the conditions are met, you can claim exemption under both Section 54 and Section 54F on the same property. Whether you build a new house yourself or purchase an under-construction house, you have three years from the date of sale. Please note that indexation will no longer be applicable when calculating the exemption; only unindexed LTCG will be considered.
Important Tax Saving Tip
Experts believe that if you’re going to sell equity mutual funds, it would be wise to sell one of your existing homes first. This will avoid violating the “no more than one home” requirement. This way, you can claim exemptions under both sections. Sell one home first and then redeem the equity investment.
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