Pay no tax, if you invest share, mutual fund profits here!

A house not only provides a roof over the head, but also saves taxes. If you buy a house by taking a home loan then, there is a deduction of up to Rs 2 lakh on loan interest and deduction under 80C on the principal. Not only this, the income earned from selling an asset can also be used to save tax by buying another house.

So how does a house help in saving tax? Let’s find out:
A large population in the country invests in shares, mutual funds, gold or property. Tax has to be paid on the income earned from such investments. If a new house is purchased from the profit earned by selling a residential property, i.e. a house then tax exemption is available under Section 54 of the Income Tax Act. At the same time,  buying a new house with the money received by selling commercial property including shares, mutual funds, gold, land etc, gives tax exemption under section.

There are certain conditions to claim tax exemption under section 54F:

First – Income from selling property should be Long Term Capital Gain (LTCG).

Second- To get tax exemption, house will have to be purchased with the entire amount received from the sale, not just the profit.

Is the profit made from selling a property a long term capital gain or not?  This will depend on the holding period, i.e. for how long the property has been held and sold.
LTCG criteria vary for different properties. For example, if a share or equity mutual fund is sold after 12 months of purchase. It is treated as a long term capital asset and the profit arising from it is considered as long term capital gain. There is 10 percent tax on such income. Similarly, for LTCG, gold has to be kept for 36 months. For property and unlisted shares, this limit is 24 months. Long term capital gains tax on gold, property and unlisted shares is 20 percent.

For example, if you invest Rs 30,000 every month in an equity mutual fund through SIP then with an expected annual return of 12 percent, you will have around Rs 70 lakh after 10 years. In 10 years, you deposited Rs 36 lakh and there will be a profit of Rs 33 lakh 70 thousand on it, i.e. capital gain. Long term capital gain tax at the rate of 10 percent will have to be paid on this income, which will be Rs 3.36 lakh.

Under Section 54F, you can save tax of Rs 3.36 lakh by buying a new house. To buy or build a new house, not just the profit, but the entire money, i.e. around Rs 70 lakh, will have to be used. To get tax exemption, a new house will have to be purchased within 2 years from the date of transfer of old asset… i.e. sale of mutual fund unit. In case of construction, the house should be completed within 3 years. If you buy a new house even a year before selling the old asset, you can avail of the discount.

To avail tax exemption under Section 54F, it is important to keep some things in mind. At the time of selling the asset, you should not have more than one residential property i.e. house. If you have one house, you can buy another house to avail the benefit of this section. The house for which you have taken Section 54F exemption cannot be sold within 3 years of purchasing it, otherwise the exemption will expire and you will have to pay tax.

If you want to buy a house under Section 54F and are not able to utilize the capital gains till the date of filing income tax return, then, that money will have to be deposited in the bank under the Capital Gains Account Scheme (CGAS) failing which, tax will have to be paid.
Not only this, despite keeping money in this account, you will have to buy a residential property within 2 years… or get it constructed within 3 years… otherwise you will have to pay long term capital gains tax…
Through Section 54F, you can buy a house with capital gains and save lakhs of rupees in tax. Infact, the government wants you to buy a house by giving tax exemption but there are some restrictions to ensure that it is not misused.

From the financial year 2023-24, under Section 54F, only long-term capital gains tax up to Rs 10 crore can be saved by buying a house. You may have to pay tax on profits above this.