In the given situation, the assessee owns only residential house (New Flat A), on the date of transfer of the original asset (Shares), therefore the condition given in Section 54F is fulfilled. Now let us see the same example with some difference.

    Flat A    Flat B    Shares
Year of Purchase    1985-86    1985-86    Various Dates*
Date of Sale    16-06-2003    14-11-2003    10-10-2003
Sale Consideration    Rs. 17,00,000/-    Rs. 15,00,000/-    Rs. 9,50,000/-
Indexed Cost of Acquisition    Rs. 9,80,000/-    Rs. 8,20,000/-    Rs. 6,45,000/-
Long Term Capital Gains    Rs. 7,20,000/-    Rs. 6,80,000/-    Rs. 3,05.000/-
Amount to be spent to claim full exemption    Rs. 14,00,000/-        Rs. 9,50,000/-
New Asset Purchased    New Flat A        New Flat B
Date of Purchase    08-09-2003        18-01-2004
Purchase Amount    Rs. 18,00,000/-        Rs. 15,00,000/-
Exemption u/s 54    Rs 7,20,000/-    Rs. 6,80,000/-    N.A.
Exemption u/s 54F    N.A.    N.A.    NIL
* Before 10-10-2002 In this example the assessee has two Flats (Flat B and New Flat A) at the time of transfer of the original asset (Shares), therefore he cannot claim exemption us 54F.

AN assessee may sell land, residential house, shares, jewellery and so on, and invest the amount of capital gains or net consideration, as the case may be, in another residential property and thereby claim exemption both under Section 54 and 54F. But care must be taken to see that the other conditions of the relevant section are not violated.

Example: Details of the assets sold by A (See Table below).

Section 54 requires only the amount of capital gain to be invested in new property.
Section 54F requires the net consideration to be invested in the new property.

Construction of independent residential unit in an existing house, for example, construction of an additional floor in a residential property, also eligible for exemption under Section 54 and 54F.

Where both land and building are sold, care to be taken to see whether these are long-term or short-term capital assets. If the land is long-term, but the building is a short-term capital asset (either because it is newly constructed or it is a depreciable asset), the sale consideration has to be split up so as to compute long-term capital gains with reference to land separately and to avail the benefit of indexation in such computation.

In respect of building, short-term capital gain/loss has to be computed separately.

For the purpose of Section 54 and 54F, cost of plot acquired by the assessee for construction of residential house will also be eligible for exemption along with the cost of construction or acquisition.

Construction can commence before the date of transfer, but completion of construction should be only after the date of transfer. Therefore, expenditure incurred for construction before the date of transfer of the asset are eligible for exemption under Section 54 or 54F so long as the construction is completed within the stipulated period.

    Residential Property    Gold    Shares    Diamonds
Date of Sale    17-12-2003    22-02-2004    05-01-2004    11-03-2004
Year of Purchase    1983-84    1987-88    1992-93    1990-91
Sale Consideration    Rs. 10,00,000/-    Rs. 6,50,000/-    Rs. 3,65,000/-    Rs. 7,60,000/-
Indexed Cost of Acquisition    Rs. 6,25,000/-    Rs. 2,55,300/-    Rs. 2,05,000/-    Rs. 4,25,500/-
Long Term Capital Gain    Rs. 3,75,000/-    Rs. 3,94,700/-    Rs. 1,60,000/-    Rs. 3,34,500/-
Investment in another residential property            Rs. 25,00,000/-   
Exemption u/s. 54    Rs. 3,75,000/-    N.A.    N.A.    N.A.
Exemption u/s. 54F    N.A.    Rs. 3,94,700/-    Rs. 1,60,000/-    Rs. 3,34,500/-

A farm-house or residential flat in a multi-storeyed building have been held to be residential house, qualifying for exemption.
Section 54F - Capital Gain on transfer of certain capital assets not to be charged in case of investment in residential house.

This section grants exemption from tax with regard to long-term capital gains arising from transfer of any capital asset, other than a residential house (the exemption from capital gains-tax arising on the transfer of a residential house is covered by section 54).
The essential conditions for availing of the exemption are:

• The assessee is an individual or Hindu Undivided Family;

• The capital asset transferred was a long-term capital asset, as defined under section2 (29A) read with section 2(42A), not being a residential house;

• The Net Consideration is invested in a residential house purchased within one year before or two years after the date of the transfer of the asset or which may be constructed within three years from the date of the transfer;

• The house purchased or constructed is not transferred within 3 years of its purchase or construction.

• The assessee owns more than one residential house on the date of the transfer of the original asset or;

• Purchases any residential house other than the new asset within a period of one year from the date of transfer or;

• Constructs any residential house other than the new asset, within a period of three years from the date of transfer of the original asset.
  

+Where the investment in the new house is less than the full value of consideration received on transfer of a long-term capital asset, the exemption will be in respect of that proportion of capital gains.

The quantum of exemption will be computed as under:

Capital gains not chargeable to tax = Cost of New asset x Capital gain (divided by) Net Consideration

Capital Gains Account Scheme

Capital Gains on transfer of certain capital assets not to be charged in case of investment in residential house if the following conditions are satisfied;

The amount of consideration if not invested in the new asset up to the date of filing of the return under section 139(1) can be deposited under the scheme.

The assessee is, however, required to file the evidence of having made the deposit in the scheme along with the return.

Net Consideration
Unlike under section 54, where only the gain on the sale of a residential house is to be invested in another residential house, under section 54F, it is the net consideration which is required to be invested.

Net Consideration is defined in the Explanation to section 54F to mean the full value of the consideration received on accruing on the transfer of the long-term capital asset, i.e the sale proceeds as reduced by any expenditure incurred wholly and exclusively in connection with the transfer of the long-term capital asset.

Residential house
Farm-house and residential flat in a multi-storeyed building have been held to be residential house, qualifying for exemption.

Exemption from capital gains
Section 54 of the Income Tax Act deals with profit on sale of property used for residence. Read on to know more about what it provides for.
THIS week we shall discuss the requirements under Section 54 of the Income Tax Act that deals with profit on sale of property used for residence. De-jargonised, this is what Section 54 provides for --

• Property sold must be a residential house, the income of which is chargeable under the "Income from house property". Self-occupied property, where the income may be nil or at a negative figure, is also entitled for exemption under this section.

• The residential property sold must be a long-term capital asset, that is, it must have been held for more than 36 months.
  

• In purchase of another residential property one year before or two years after the sale of original property.
  
• In constructing another residential property within a period of three years after the date of sale.

• Cases of allotment of flats under the self-financing schemes of the Delhi Development Authority shall be treated as cases of construction for the purposes of capital gains.

• If the terms of the schemes of allotment and construction of flats / houses by the co-operative societies or other institutions are similar to those of Delhi Development Authority, such cases may also be treated as cases of construction for the purposes of exemption under section 54.

• The cost of the land is an integral part of the cost of the residential house, whether purchased or built. Accordingly, if the amount of capital gain is appropriated towards purchase of a plot and also towards construction of a residential house thereon, the aggregate cost should be considered for determining the quantum of deduction under section 54, provided the acquisition of plot and also the construction thereon are completed within the specified period.

• The cost of the new asset should equal or exceed the amount of capital gain, else the exemption will be calculated proportionately and the balance will be charged as Long Term capital gain.

• If an assessee has retained more than one house for the purposes of his own or the parent's own residence and has used them for such residence and not for any other purpose, the capital gains arising on transfer of each house would qualify for exemption under section 54, provided the other conditions are satisfied.

• New residential property purchased should not be sold within a period of three years from the date of its purchase or construction. If sold, the cost of the new asset is to be reduced by the amount of Capital gain exempted from tax on the original asset and the difference between the sale price of such new asset and the reduced cost will be chargeable as Short term capital gain in the year in which it is sold.

• Where the amount of capital gain is not appropriated or utilised by the assessee for the acquisition of the new asset before the due date of furnishing return of income, it shall be deposited in the "Capital Gains Account Scheme" with any specified bank or institution and the return of income shall be accompanied by proof of such deposit.

• If the amount deposited in the Capital Gains Account Scheme is not utilised wholly within the specified time limit, the capital gain or the unutilised deposit will be brought to tax in the year in which the specified period expires.

• The unutilised deposit amount in the Capital Gains Account Scheme, in case of an individual who dies before the expiry of the two / three years stipulated period, cannot be taxed in the hands of the deceased. This amount is not taxed in the hands of the legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.