Step-by-Step Computation

Let’s assume you sell a capital asset (other than a residential house) and want to compute the exemption on the long-term capital gain under Section 54F.

Step 1: Compute the Long-Term Capital Gain (LTCG)

• LTCG = Sale Consideration – (Indexed Cost of Acquisition + Direct Expenses)

  • (Remember, for long-term assets, indexation is allowed under Section 55(2).)

Step 2: Determine the Net Sale Consideration

• This is the total amount received from the sale after subtracting any expenses directly attributable to the sale (such as brokerage).

Step 3: Invest the Net Sale Consideration

• Ensure that the entire net sale consideration is reinvested in a residential house property as per the prescribed timeline.

Step 4: Calculate the Exemption

• Exemption Amount = (Investment in Residential House × LTCG) / Net Sale Consideration

  • If the entire net sale consideration is reinvested, the exemption equals the entire LTCG.

  • If only a part is reinvested, then only the proportionate share of the gain gets exempted.

Step 5: Tax on the Remaining Gain (if any)

• The remaining capital gain (if any) that is not covered by the exemption is subject to tax at the applicable long-term capital gains rate (20% plus applicable surcharge and cess).

The principal provision for claiming exemption on the capital gain from the sale of a residential house property is contained in Section 54 of the Income Tax Act, 1961

To claim exemption on long-term capital gains on the transfer of residential house property, a taxpayer must meet the following conditions:

1. Nature of the Asset and Holding Period:

   • The house property being sold must qualify as a long-term capital asset. For residential house property, the asset is considered long-term if it has been held for at least 24 months (this period is applicable for properties acquired after a prescribed date, as per current law).

2. Reinvestment Requirement:

   • Purchase Option:
     The taxpayer must invest the net sale consideration (i.e., the sale proceeds after deducting expenses directly related to the sale, such as brokerage and transfer expenses) in the purchase of a new residential house property either:

     • One year before the date of transfer or,

     • Two years after the date of transfer.

   • Construction Option:
     If the taxpayer opts for constructing a new residential house property, the construction must be completed within three years from the date of transfer of the original property.

3. Quantum of Exemption:

   • The exemption is available only to the extent of the capital gain that is invested in the new residential property.

   • If only a part of the net sale consideration is reinvested, the exemption will be restricted proportionally; that is, only a part of the capital gain corresponding to the amount invested qualifies for exemption.

4. Utilization and Subsequent Sale:

   • The new residential property, in which the capital gain is reinvested, must be held for the minimum period as prescribed.

   • If the new property is sold within the prescribed period (3 years for purchased property or 4 years for constructed property), the previously claimed exemption may become taxable in the year of such subsequent transfer.

5. Documentation and Compliance:

   • Proper documentation (such as sale deed of the original property, purchase agreement or construction contract of the new property, bank statements, and relevant receipts) must be maintained as evidence to support the reinvestment claim when filing the Income Tax Return (ITR).

This section deals with the taxation of capital gains arising from Joint Development Agreements (JDA). It applies only to individuals and Hindu Undivided Families (HUFs).

Bare Act Extract – Section 45(5A):

“In the case of an assessee being an individual or a Hindu undivided family, the capital gain arising from the transfer of a capital asset, being land or building or both, under a specified agreement shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority…”

How is Capital Gain Calculated?

Capital gain will be calculated in the year in which the completion certificate is issued, not when the agreement is made.

🔹 Full Value of Consideration (FVC):

The stamp duty value (SDV) of the share of constructed property received by you + any monetary consideration received from the builder.

🔹 Less: Indexed Cost of Acquisition (ICOA):

The cost of the land (acquired or inherited) indexed as per Cost Inflation Index (CII).

🔹 Capital Gain = FVC – ICOA

Conditions to Apply Section 45(5A):

1. Transfer is made under a registered development agreement.

2. Applicable only to Individuals and HUFs.

3. Completion certificate is issued by the competent authority.

Important Notes:

• If you sell your share in the project before completion, Section 45(5A) will not apply. In such cases, capital gain is taxed in the year of transfer under general provisions.

• If you received advance payments, TDS @10% under Section 194-IC is applicable on monetary consideration.

✅ User-Friendly Example:

Suppose you own a plot and enter into a JDA in FY 2024-25. The builder agrees to give you 3 flats + ₹20 lakhs. The completion certificate is issued in FY 2026-27. The SDV of 3 flats is ₹1.5 crore.

Let’s assume:

• Indexed cost of land = ₹40 lakhs

Capital Gain = (₹1.5 crore + ₹20 lakhs) – ₹40 lakhs = ₹1.3 crore
This ₹1.3 crore is your Long-Term Capital Gain, taxable in FY 2026-27 (AY 2027-28)