Section 54F tax exemption can be availed even in case of ownership of two houses but through some financial strategies pertinent to Hindu Undivided Families (HUF) recognized under Indian tax law. Chartered Accountant at CNK & Associates, Mahesh Nyak, clarified that the conditions that need to be met before the sale of shares. For those planning to invest proceeds from sale of shares to residential property, must take note of specific legal requirements.
Understanding HUF and Section 54F
Considering a situation wherein a person who owns two residential properties, plans to sell shares and use the proceeds to claim exemption under Section 54F of the Indian Income Tax Act. This provision allows HUFs save long-term capital gains tax by selling a non-residential asset—like shares, gold, or land—and reinvest the net sale proceeds into buying or building one residential house in India. Let’s find out the effective path that one must follow to claim Section 54F exemption and the lawful process to transfer the property.
Insights on tax exemptions on investment in residential property
According to chartered accountant Mahesh Nyak, the exemption for reinvestment in residential property would be covered under section 54F (section 86 of the Income Tax Act, 2025) if one plans to sell shares and invest proceeds in residential property on the condition that the person does not own more than one residential house as on the date of the sale of shares.
To claim the benefit of tax exemption, taxpayers often gift one of the properties to a relative before the date of the sale of the asset. However, if the asset is transferred into the HUF as property of the family, then the income arising from the property such as rent does not automatically go in the hands of the HUF. It is clubbed with the income of the individual who impressed such property. This happens because the property in consideration would still be considered as a property transferred by individual to the HUF.
Furthermore, the individual would be able to claim exemption under section 54F after transfer of one property to HUF as the individual would legally own only one residential property on the date of sale of shares, Mahesh Nyak said. Diving deeper to understand the dynamics at work, consider the situation where the property or part of it is transferred to the spouse on partition of the HUF then the clubbing provisions may also apply in the individual transferring the property.
The expert further notes, “HUF is not a separate legal entity (although a separate person for tax purposes),” suggesting that if the individual is the ‘karta’ of the HUF then that person can continue to hold the property on behalf of the HUF which makes in no change in the legal ownership.
Thus, the individual planning to sell shares needs to consider the possibility of making a declaration that the property owned in individual capacity is being converted into and will be held by the same as the karta of the HUF.
Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked as a reporter, a podcaster and an editor for publications across India.