Tax Exemption Under Section 54 and Section 54F for NRIs: Differences, Similarities

NRIs face issues regarding tax liability when they sell their property or any other asset in India. Under the Income Tax Act 1961, there are two sections, Section 54 and Section 54F, which can help NRIs save taxes if they are willing to reinvest Long-Term Capital Gains to purchase/construct a residential property in India.

Under Section 54 of the Income Tax Act, NRIs can claim tax exemptions on Long-Term Capital Gains by investing the capital gains from selling residential land and buildings to purchase or construct residential property.

Section 54F of the Income Tax Act provides that NRIs can claim an exemption on Long-term Capital Gains from selling assets other than a residential house, provided the net consideration is reinvested in purchasing or constructing a new residential house property.

These sections offer NRIs a great opportunity to strategically reduce their tax liability by reinvesting in India's growing real estate sector.

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What Are Section 54 and Section 54F?

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Section 54

Section 54 exempts taxpayers from the taxation of long-term capital gains accruing from the sale of a residential property, provided they reinvest the capital gain in buying or constructing another residential property in India.

The key provisions of Section 54 are:

Eligibility: An NRI who sells long-term capital assets, such as residential buildings or lands held for at least 24 months.
Provided any one of the two conditions is satisfied :

A residential house has been purchased within one year before or two years after the date of the sale of the old property.
A new residential house is constructed within three years of the date of sale/ transfer of the property.

Exemption revocation: If the new residential house is sold within three years, the exemption granted earlier will be withdrawn, and the gains will be taxable as short-term capital gain.
Two Property Investment Exemption: Exemption can be claimed for up to two properties only once in a lifetime if the capital gains are below ₹2 crores.
A maximum of ₹10 crores exemption from capital gains. Any capital gains over ₹10 crores from the sale of a residential property will no longer be eligible for exemption under Section 54.

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Section 54F

Section 54F provides tax exemption on capital gains from selling other long-term capital assets such as shares, bonds, gold, mutual funds, etc. (except residential property), provided that the proceeds are reinvested in purchasing or constructing a residential house in India.

The key provisions are:

Eligibility: An NRI selling long-term capital assets not being a residential house, e.g. shares, bonds, gold, etc.
Provided any one of the two conditions is satisfied :
1. Purchase a new residential property one year before or two years after the date of sale.
2. Construct a new residential property within three years from the said sale date.

When the entire sum is reinvested, the entire amount is tax exempt. However, only a part of the sale proceeds is reinvested. In that case, exemption under section 54F is available to the extent of the proportion.
To claim the exemption, a person should not hold more than one house apart from the new house they are purchasing or constructing at the time of the sale/transfer of the original asset (such as land, shares, mutual funds, etc.).
Capital Gains exceeding ₹10 crores: Any capital gains over ₹10 crores arising from the sale of a long-term capital asset will no longer be eligible for exemption under Section 54F.

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Remember: NRIs' sale of property in India might result in capital gains tax, and the buyer must deduct TDS as per the directives of the Income Tax Department.

Here’s a useful read on how capital gains from property are taxed for NRIs.

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Difference Between Section 54 And Section 54F

Debt Mutual Fund Information

Basis	Section 54	Section 54F
Type of Asset on Sale	Residential House Property.	Any Asset other than Residential House Property.
Amount of Exemption	To the extent of Long-Term Capital Gain invested.	Full/Partial exemption allowed.
Ownership of additional residential property	There is no restriction on the number of residential properties a person can hold at the time of sale.	The taxpayer should own up to one residential house when selling the original asset.
Revocation of Exemption in case of sale	If a taxpayer sells the new asset within three years, the tax authorities will revoke the earlier claimed exemption and tax the capital gains as short-term capital gains.	If a taxpayer sells the new asset within three years, the tax authorities will revoke the earlier claimed exemption and tax the capital gains as long-term capital gains.
Revocation of Exemption in case of a new asset being purchased/constructed	Not Applicable - the taxpayer can also purchase or construct another asset.	Applicable in case: (1) a new residential property if purchased within two years. (2) a new residential property if constructed within three years.

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Similarities Between Section 54 And Section 54F

Following are the similarities between Section 54 and Section 54F

Eligibility for capital gains exemption: The asset sold should be a long-term asset by an NRI.
Holding period of assets: Minimum 24 Months
Time period for investment: In the case of purchase, one year before or two years after the sale and within three years in the case of construction.
Minimum holding period of new asset: The new residential property must not be sold within three years of its purchase or construction.
Capital Gains Account Scheme (CGAS): Allows taxpayers to deposit capital gains from property sales into a designated account, deferring tax liability and reinvesting the funds in a new residential property within the required time frame under Sections 54 and 54F of the Income Tax Act.‍
Capital gains exemption section 54 vs 54F: Up to INR 10 crores is available for exemption.

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Benefits Of Section 54 And Section 54F For NRIs

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Benefits of Section 54 for NRIs

Claim exemption from Long-Term Capital Gains: NRIs who sell a residential property in India and reinvest the gains in buying another residential property are exempt from paying long-term capital gain tax.
Reinvestment Flexibility: NRIs can purchase or construct a residential property in India within a stipulated time frame to avail themselves of tax benefits.
Tax Planning: Exemption on capital gain helps NRIs have a better tax-planning option by reducing their taxable income.
Potential to Save on Tax Liability: By reinvesting capital gains, NRIs can reduce their overall tax liability arising from the sale of residential properties.‍
Holding Period Consideration: In the case of properties held for more than 24 months, NRIs can claim the benefit of long-term capital gains tax treatment.

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Benefits of Section 54F for NRIs

Claim exemption on any long-term capital asset: NRIs can claim tax exemption on the sale of any long-term capital asset in India other than residential property. The net sale consideration must be reinvested in a residential property.
Option to avail complete/partial Exemption: The option provides a full exemption if the buyer reinvests the entire net sale consideration in a new residential house. However, it offers a partial exemption if the buyer only reinvests a part of it.
Time frame for reinvestment: NRIs enjoy flexibility in purchasing or constructing a new residential property a year before or two years after the sale, with three years for construction.
Opportunity to invest in real estate: Section 54F encourages and motivates NRIs to invest in residential property in India. It helps to facilitate long-term investment in the Indian real estate market.
Strategic tax management: NRIs can manage their tax liabilities under Section 54F strategically. Reinvesting proceeds from the sale of long-term capital assets into residential property helps optimize tax savings while growing real estate portfolio.

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How Can iNRI Help?

At iNRI we provide comprehensive tax services such as Tax Consultancy, Tax Return Filing, Repatriation, Real Estate Transactions, etc. We have tax experts who provide NRIs with personalized tax planning to optimize their capital gain tax liability while adhering to best tax practices.

Link Button Hire A Tax Expert

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Section 54 and Section 54F: Frequently Asked Questions (FAQs)

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Is section 54F applicable to NRI?

Yes, section 54F applies to NRIs selling Other Long-term Assets.

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Is exemption under section 54 available to NRI?

Yes, capital gain exemptions under Section 54 of the Income Tax Act are available to Non-Resident Indians.

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What is the difference between sections 54 and 54F?

Section 54 provides exemptions on capital gains from the sale of a residential property when reinvesting in another residential property in India. At the same time, Section 54F offers exemptions on capital gains from the sale of any long-term capital asset (other than a residential property) when reinvested in a new residential property in India.

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