Explained: How You Can Save Tax On Stock Market Profits Under Section 54F Of Income Tax Act

If you are an existing investor in the stock market or are keen to do so, it's likely that you are aware of the short- and long-term taxation rules on capital gains, right? But what if we told you that you could save tax on the profits earned through the stock market?

Yes, you read that right. Taxes on long-term capital gains arising from assets such as stocks, gold, and mutual funds can indeed be saved. Curious to know how? Well, it's through Section 54F of the Income Tax Act.

What Section 54F Says

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Under the Income Tax Act, this section allows claiming an exemption on long-term capital gains that you may have realised on selling any capital asset other than a residential property if the proceeds are used to buy a residential house.

So, the gains could be from equities, jewellery, bonds, etc. And while the capital gains are taxed as per the applicable rules, you can claim an exemption if the proceeds are used to buy a residential house.

Also Read: PPF vs ELSS vs Tax Saver Bank FD

Conditions To Fulfil For Exemption

1. The exemption under Section 54F is available only to individuals and Hindu undivided families (HUFs).

2. You should not own more than one residential house at the time of the sale of the original asset (other than the one you are purchasing now).

3. To avail of the exemption, the house must be purchased within one year before or two years after the date at which such a capital asset is sold.

4.In the case of a house, construction must be completed within three years of the sale of such a capital asset.

5.Transfer the proceeds to a "capital gains account" with a bank if you are unable to use the sale proceeds for the said purpose before the due date for filing the income tax return of the financial year in which such a capital asset is sold.

6. This exemption gets reversed if you sell this new property within 3 years of its purchase or construction , or if you purchase another residential house within 2 years of the sale of the original asset, or construct a residential house other than the new house within 3 years of the sale of the original asset. Capital gains from the sale will be taxed as long-term capital gains.

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Also Read: How To Invest In Real Estate 'Without' Actually Buying A Property

Portion Of Capital Gains Exempted

To understand this, let us assume that an investor has sold assets worth about Rs 60 lakh, of which their capital gains are Rs 10 lakh. If the investor then re-invests this amount for the purchase or construction of the residential house, the amount of capital gains exempted is calculated as follows:

Case 1: When the entire amount is re-invested

In case the entire amount from the sale of assets is re-invested for the purchase or construction of the residential house, the investors can claim exemption on the entire capital gains, i.e., Rs 10 lakh in this case, as per value research.

Case 2: When a part of sale proceeds is invested

In cases where a portion of the sale proceeds is re-invested, the capital gains exemption under Section 54F is calculated on the proportion of the amount re-invested.

Exemption = cost of new house x capital gains or sale receipts, according to cleartax.

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