There are three key conditions to qualify: the asset whose sale proceeds are to be invested should be held for the long term, the house must be bought one year after or before selling the main asset, and you must not own more than one house at the time of sale of the asset.

However, this is not as simple a solution because Section 54F puts several conditions.

In this story, Mint addresses the intricacies of Section 54F in a question and answer format.

Can I use the sale proceeds to pay an existing home loan?

Prakash Hegde, chartered accountant, Acer Tax & Corporate Services, said tax payers can use the sale proceeds to repay a home loan and get exemption as long as the other conditions are being met. “If the house property is purchased or constructed within the specified period (before or after the sale of shares/MF), irrespective of the purpose for which the proceeds are utilised, exemption would be available,” he said.

For example, if you bought a house with a loan two years before selling the main asset, say shares, you will not get exemption on capital gains tax if you use the sale proceeds of shares to pay the loan. However, if the same house was bought within one year before you sold the shares, you can claim exemption on LTCG tax to be paid on the shares.

What if I sell my shares as a single holder and want to buy the house in joint ownership?

You will get exemption, however, the purchase price for calculating exemption will not be the full amount. The general rule under 54F is that one must use the entire sale amount, and not just capital gains, to buy the property in order to claim exemption. When the property purchase price is less than the total sale amount of the capital asset, you get a deduction on a proportionate amount of capital gains. “In case of joint ownership, it is better to consider your share only for computing capital gains,” said Karan Batra, managing partner, Chartered Club.

What if I sell shares that were in joint ownership and want to buy a house as a single owner?

In this case, you can use the sale proceeds that you receive in proportion to your ownership to claim exemption. For instance, if you hold 50% ownership in shares, you can use half of the total sales proceeds to reinvest and claim exemption.

If I deposit sale proceeds from shares in a Capital Gains Accounts Scheme (CGAS), do I still need to disclose it in ITR?

No, it’s not required. The idea behind depositing the sale proceeds in CGAS is to reserve the money for purchasing a house and to not pay tax on the gains if you intend to purchase the house after the Income Tax Return (ITR) filing due date. However, you must reinvest the sale proceeds in a property within a year of selling the main capital asset, else, you will have to pay capital gains tax later.

Are registration and stamp duty included in calculating purchase price of the new house property?

Yes, registration and stamp duty make up the total purchase price of a property. “Any expenses incurred exclusively for the acquisition of the new asset are factored into the asset’s cost. This includes expenses such as stamp duty, registration charges, brokerage fees, and the like,” said Neeraj Agarwala, Partner, Nangia Andersen India.

Will I be eligible if I use the sale proceeds to reconstruct an existing house?

Agarwala said the reconstruction or renovation of an existing house is not covered under section 54F. This is because plain reading of section 54F in the Income Tax Act suggests that the exemption is allowed on purchasing a new asset. “…the assessee has, within a period of one year before or after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset)…” the Section reads.

If I own a house and one empty plot at the time of selling my shares, and wish to buy another house with the sale amount of shares, will I be eligible for exemption?

Yes, in this case sale proceeds of shares will be eligible for exemption, said Batra. “IT laws don’t treat plots as residential property. So, in the above case, the taxpayer essentially owns one house and hence, is eligible to claim exemption on capital gains tax by buying one more house. They can also build a house on the plot and claim exemption,” he said.

Are NRIs eligible?

NRIs are eligible to seek tax exemptions under Sections 54 and 54F if the house property is bought in India. “It is important to note that the seller cannot use the proceeds to buy a residential property abroad while still claiming the exemption,” said Agarwala.

Also Read: How buying a new home can save you capital gains tax on shares, mutual funds