According to tax expert Mahesh Nayak from CNK & Associates, taxpayers can potentially claim Section 54F exemption while selling shares even if they own more than one residential house. The exemption under Section 54F (Section 86 of the Income Tax Act, 2025) is available for reinvestment in residential property, but comes with specific conditions. As reported by Mint, the exemption is not available if the taxpayer owns more than one residential house on the date of sale of shares. The provisions specify that exemption is available only to an individual or a Hindu Undivided Family (HUF) and applies to capital gain arising from transfer of long term capital assets other than residential houses. The net consideration for exemption purposes is defined as the full value of consideration received on transfer minus any expenditure exclusively incurred in connection with the transfer.
As explained by Nayak, taxpayers typically gift one property to a relative before the date of sale to claim the exemption. When a property is transferred to an HUF, it remains legally owned by the individual with income categorized accordingly. According to the expert, income from the property is clubbed in the hands of the individual who impressed such property, meaning the taxpayer continues to be treated as the owner for tax purposes. This approach allows the taxpayer to claim exemption under Section 54F, as they would own only one residential property on the date of sale of shares. The net consideration for exemption purposes is defined as the full value of consideration received on transfer minus any expenditure exclusively incurred in connection with the transfer. However, if the asset is transferred into the HUF as property of the family, then the income arising from the property such as rent does not automatically go in the hands of the HUF. It is clubbed with the income of the individual who impressed such property, as the property would still be considered as a property transferred by individual to the HUF.
According to Nayak's analysis, an HUF is not a separate legal entity, though it is treated as a separate person for tax purposes. As reported by Mint, when the taxpayer is the karta of the HUF, they continue to hold the property on behalf of the HUF, resulting in no change in the legal owner. The expert suggests examining the possibility of making a declaration that the property owned in individual capacity is now held by the karta of the HUF. The exemption is not available if the taxpayer purchases additional residential houses within one year from the date of transfer or constructs additional houses within three years from the transfer date. In situations where the property or part of it is transferred to the spouse on partition of the HUF, the clubbing provisions may also apply in the individual transferring the property.
The provisions specify that the amount must be invested within one year before or two years after the date of transfer for purchasing existing residential houses, or within three years for constructing new residential houses. If the amount is not re-invested by the last day of filing the return, the unutilized amount must be deposited in the capital gain deposit account scheme. The unutilized amount can be used for purchasing or constructing residential houses within two years or three years respectively. If the assessee fails to utilize the amount within the specified period, the unutilized amount is treated as capital gain on a proportionate basis based on the exemption claimed earlier. The exemption is withdrawn if the newly purchased or constructed residential house is transferred before three years from the date of purchase or construction. The assessee cannot transfer the newly purchased or constructed residential house for a period of three years from the date of purchase or date of construction, as the case may be.
