Income Tax Rules Explained: Can You Claim Exemption on Long-Term Capital Gains From Selling a Commercial Property?
Many taxpayers are unsure about how long-term capital gains (LTCG) from the sale of a commercial property are treated under the Income Tax Act. A common question is whether the tax exemption available under Section 54 can be claimed on gains earned from selling a commercial asset. The answer lies in understanding the difference between Sections 54 and 54F of the Income Tax Act, along with their conditions and limitations.
This issue was recently raised by a taxpayer who sold a commercial property and earned long-term capital gains. The key concern was whether these gains could be exempted by reinvesting them in a residential property. Tax experts clarify that while exemption is possible, it does not fall under Section 54 in such cases.
What Does Section 54 Cover?
Section 54 of the Income Tax Act provides exemption from long-term capital gains tax when a residential property is sold and the gains are reinvested in another residential house. This benefit is available to individuals and Hindu Undivided Families (HUFs).
The exemption under Section 54 applies whether the sold residential property was self-occupied or rented out. To qualify, the taxpayer must invest the long-term capital gains—either by purchasing a residential property within the prescribed time limit or by constructing a house.
Importantly, there is no restriction on the number of residential properties owned by a taxpayer at the time of claiming exemption under Section 54. The focus is only on reinvesting the capital gains amount, not the entire sale proceeds.
Why Section 54 Does Not Apply to Commercial Property
Section 54 strictly applies to the sale of residential properties. If the asset sold is commercial in nature—such as a shop, office, or commercial building—the exemption under Section 54 cannot be claimed, regardless of how the proceeds are used.
This is where many taxpayers get confused. Even if the money from selling a commercial property is used to buy a house, Section 54 will still not apply.
Section 54F: The Relevant Provision for Commercial Property
For long-term capital gains arising from the sale of a commercial property, Section 54F becomes relevant. This section allows exemption if the net sale proceeds are invested in a residential property within the specified timeline.
The key difference between Section 54 and Section 54F lies in what must be reinvested:
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Section 54: Only the long-term capital gains need to be reinvested.
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Section 54F: The entire sale consideration (not just the gains) must be invested in a residential property to claim full exemption.
If only part of the sale proceeds is invested under Section 54F, the exemption will be allowed proportionately.
Conditions to Claim Exemption Under Section 54F
While Sections 54 and 54F have similar timelines for investment, Section 54F comes with stricter conditions:
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The taxpayer must not own more than one residential house on the date of sale of the commercial property. The new house being purchased is excluded from this count.
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The entire net sale consideration must be invested to claim full exemption.
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If the cost of the new residential property exceeds ₹10 crore, the exemption will be capped at ₹10 crore.
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The taxpayer should not purchase another residential property within two years or construct another house within three years, other than the one used for claiming exemption.
Failure to meet these conditions can lead to withdrawal of the exemption and taxation of the capital gains.
Investment Timeline to Keep in Mind
To claim exemption under Section 54F, the taxpayer must:
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Purchase a residential property within one year before or two years after the sale of the commercial property, or
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Construct a residential house within three years from the date of sale.
If the gains or sale proceeds are not immediately invested, they must be deposited in the Capital Gains Account Scheme before filing the income tax return.
Key Takeaway for Taxpayers
If you sell a commercial property and earn long-term capital gains, you cannot claim exemption under Section 54. However, relief is still available under Section 54F, provided you meet all the prescribed conditions, especially the requirement of investing the full sale proceeds and owning only one residential house at the time of sale.
Given the complexity of these provisions and the high tax impact involved, taxpayers should carefully plan their reinvestment strategy and seek professional advice before finalizing transactions.
Understanding the correct section and conditions can help you legally save a significant amount of tax while staying fully compliant with income tax laws.
