Taxpayers Face Uncertainty Over Multiple Section 54F/86 Claims

Income Tax Exemptions: Understanding the Rules for Repeated Claims

A taxpayer who plans to use capital gains from multiple share sales to buy residential properties over different years has raised a question about claiming the Section 54F exemption under the Income Tax Act, 1961. This exemption allows investors to invest the gain from the sale of shares in a residential house without paying tax on the gain. However, the conditions for claiming this exemption are complex and may lead to the reversal of the tax exemption if not followed carefully.

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Eligibility for Section 86 Exemption

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Section 86 of the Income Tax Act 2025, which corresponds to Section 54F of the Income Tax Act, 1961, grants an individual and HUF exemption from long-term capital gains arising on the sale or transfer of a capital asset other than a residential house. However, this exemption is not available if the taxpayer owns more than one residential house property as of the date of sale of such capital asset.

Reversal of Exemption

In case a taxpayer claims the exemption under Section 86 and then buys another house within two years from the date of sale of shares, the exemption claimed gets reversed. The amount of long-term capital gains claimed as exempt earlier becomes taxable in the financial year in which such a house is bought. For instance, if a taxpayer buys another residential house within two years from the date of sale of shares in 2025, the exemption claimed in the financial year 2025 gets reversed, and the amount becomes taxable as long-term capital gains in the year 2027.

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Claiming Exemption Multiple Times

Taxpayers who do not buy another house within two years from the date of sale of shares can claim the exemption under Section 86 in subsequent years. For example, if a taxpayer does not buy the second house in 2027 and since they would be owning only one residential house in 2029, they can claim the exemption under Section 86 in the financial year 2029.