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How to save tax using Section 54F for an under construction house?

Posted on 24 Mar 2024
Author: Sayan Sircar

Tags: Tax ; Calculator ; House Purchase

7 mins read
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This article shows you the right way to apply Section 54F to save tax when you sell shares and mutual funds to buy an under-construction house.

How to save tax using Section 54F for an under construction house?

This article is a part of our detailed article series on the concept of tax savings using Section 54F. Ensure you have read the other parts here:

Frequently asked questions on Section 54F: the complete guide

This article compiles an exhaustive list of FAQs on the concept of tax saving while purchasing a house under Section 54F.

Sec 54F: a hack that can save lakhs in taxes when you buy a house

This article shows how to save capital gains taxes under income tax Section 54F when you sell other assets to raise money to buy your first or second house.

📚 Topics covered:

What is Section 54F?
The key rules for applying Section 54F to an under-construction house
We have an easy-to-use calculator for Section 54F exemption calculation
Builder delays beyond 3 years
Opening and using a Capital Gains account (CGAS)
Timing the home loan application and prepayment of loan
Payment for future instalments
Payment for Interiors and appliances

What is Section 54F?

Section 54F of the income tax act allows individuals and HUFs to save capital gains tax if they sell certain long-term capital assets, like mutual funds, shares, gold, etc., and use the proceeds to buy or construct a residential house in India.

The purpose of this article discusses how to apply Section 54F to an under-construction house.

We have extensive FAQs on Section 54F here in case you wish to know more: Frequently asked questions on Section 54F: the complete guide

The key rules for applying Section 54F to an under-construction house

Every calculation is based on the agreement date. Depending on the state, this is also called allotment date or builder-buyer-agreement date

Rule 1: your share/MF sale that gets 54F advantage has to happen within one year before and one year after the agreement date
Rule 2: the house has to be constructed within 3 years of the agreement date which is measured by the registration date
Rule 3: you cannot sell the new house before 3 years of the registration date
Rule 4: the new house is your first or second house and not your third, fourth etc
Rule 5: everything like shares, mutual funds, RSUs, gold etc is eligible for selling . Only real-estate is not eligible

Violation of any of the rules above will invalidate Section 54F exemption. For more nuances, please refer to the FAQ article linked above.

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We have an easy-to-use calculator for Section 54F exemption calculation

Section 54F Calculator

We will use Google sheets to create a simple calculator for this calculation. There is a link to download a pre-filled copy of the Google sheet via the button below.

Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.

Please refer to the Sec54F tab of the sheet once you open it. As the calculator shows, the rules are applied as per the middle “Under-construction” section.

We will now cover some nuances for under-construction properties:

Builder delays beyond 3 years

Rule 2: the house has to be constructed within 3 years of the agreement date which is measured by the registration date

Builder delays beyond 3 days from the agreement date will violate rule 2. This rule is not strictly enforced as it is somewhat expected that the construction will be delayed. In such cases, the Income Tax Appellate Tribunal has ruled in favour of the tax-payer.

Opening and using a Capital Gains account (CGAS)

Capital Gains Account Scheme (CGAS) must be opened if you sell shares/mutual funds before 31st July (the income tax filing last date) and can spend it only after 31st July. In such a case, you must deposit the amount in the CGAS and later withdraw as per need. The CGAS account gives a small amount of interest.

At this point, the investor must weigh the benefit of tax saving using Section 54F by breaking their investments early vs. keeping the money invested longer.

Timing the home loan application and prepayment of loan

Rule 1: your share/MF sale that gets 54F advantage has to happen within one year before and one year after the agreement date

Here it is important to time the payments required to be made with the asset sale correctly. Once you sell the assets, you will have to deposit the amount in the CGAS in case you need it in the future. You can also prepay the home loan.

Payment for future instalments

If you have multiple payments more than a year after the agreement date, you cannot get Section 54F exemption unless you sold the assets within 1-year. We will give an example:

Agreement date: 1st Jan 2024 » Section 54F benefit applies for MF/share sales up to 1st Jan 2025
30 lakhs Mutual fund sale date: 1st June 2024 » Section 54F benefit applies
Builder payment date for 20 lakhs instalment: 1st July 2024
CGAS account deposit for the 10 lakhs remaining: a must before 31st July 2024
Mutual fund sale date: 1st Dec 2024 » Section 54F benefit applies
Builder instalment payment date: 1st Feb 2025 (from CGAS and above 1st Dec sale)
Mutual fund sale date: 1st Jun 2025 » Section 54F benefit DOES NOT apply
Builder instalment payment date: 1st Feb 2026 » can be via home loan or other self funds (without 54F benefit) or if there is CGAS balance

Payment for Interiors and appliances

A house includes payments to the builder as well as reasonable costs for interiors, appliances etc. As long as you have proper GST bill for interiors and other costs, you should get Section 54F benefit.

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