Can You Save Tax by Investing Mutual Fund LTCG in Property? Experts Explain Section 54F Rules

Many investors wonder if they can save tax by reinvesting long-term capital gains (LTCG) from the sale of mutual funds into residential property. According to tax experts, this is possible under Section 54F of the Income Tax Act, but only if certain conditions are fulfilled.

What Section 54F Allows

Section 54F provides tax exemption on LTCG earned from selling any long-term capital asset (other than a residential house) if the gains are reinvested into purchasing or constructing a residential property. This means that if an individual sells mutual fund units and reinvests the capital gains in a house, they can claim exemption.

However, the exemption comes with strict timelines and eligibility rules:

• The new property must be purchased within two years from the date of sale, or

• The taxpayer must construct a residential house within three years of the sale, or

• If a property was purchased within one year prior to selling the asset, exemption can also be claimed.

Case Study: Investor with Multiple Properties

A Gurgaon-based investor, Pankaj Sharma, raised a common question. He plans to sell his mutual funds and reinvest the LTCG in a house. However, he already owns two residential properties. Would he still qualify for the exemption?

Tax expert Balwant Jain explained that Section 54F specifically requires that on the date of sale, the taxpayer must not own more than one residential house. Since Sharma already owns two houses, he will not be eligible for the exemption unless he reduces his holdings.

Possible Solution

Jain clarified that if the investor sells one of his existing houses before redeeming the mutual funds, he would then be left with only one property. This way, he can qualify under Section 54F and claim exemption on the reinvested capital gains.

Partial Exemption Rule

Another important detail: if the entire LTCG is not reinvested, exemption can still be claimed on the portion that is actually used for purchasing or constructing the new property. For example, if only half of the capital gains are invested, the exemption will be proportionate.

Key Conditions for Claiming Exemption under Section 54F

• Applies to individuals and Hindu Undivided Families (HUFs).

• Exemption is only for assets other than a residential property (such as mutual funds, gold, shares, or land).

• The taxpayer must not own more than one house on the date of the asset’s sale.

• The new house must be bought within 1 year before or 2 years after the sale, or construction must be completed within 3 years.

• If the investment is partial, exemption is allowed only for the invested amount.

Expert Takeaway

While Section 54F offers a valuable tax-saving opportunity, it is not open-ended. The restriction on owning multiple properties is a key hurdle for many urban investors. Experts advise planning property sales and mutual fund redemptions carefully to maximize tax benefits.

For those holding more than one house, restructuring property ownership before selling mutual funds could open the door to significant tax savings.