Section 54F of the Income Tax Act, 1961 is a section that allows tax exemption on the long term capital gains earned from selling a capital asset, other than a house property. So, if you sell a capital asset like shares, bonds, jewellery, gold, etc. and reinvest the sale proceeds towards the purchase or construction of a house property, the returns earned on the sale of the capital asset would be allowed as an exemption from tax under Section 54F.

A taxpayer can claim exemption u/s 54F if all the below conditions are satisfied:

1. Who can Claim: The taxpayer must be an Individual or HUF. The benefit of exemption is not available to the company, LLP, or Firm.
2. Type of Assest: The asset sold is a Long Term Capital Asset (LTCA) other than House Property.
3. On the date of sales, the taxpayer does not own more than one house property.
4. Time for Investment for purchase: A new Residential House is purchased before 1 year or after 2 years from the sale of the long term capital asset, or
5. Time for Investment for construction: In case of construction of a new House Property, within 3 years from the sale of the residential House Property.
6. Property outside India: A new Residential House should be in India.
7. Amount of Exemption: As mentioned above, the Amount of Exemption under Section 54F will be available as per the following formula:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains.

8. The consequences of transferring the asset

The house property that you buy or construct using the sale proceeds of the capital gain should not be transferred or sold within 3 years of purchase or completion of construction. If you transfer the house property within 3 years, the exemption allowed under Section 54F of the Income Tax Act would be withdrawn and the capital gains incurred would become taxable from the year that the transfer takes place. 

9. Capital gain deposit account scheme

There might be times when you are unable to use the full or partial amount of the sale proceeds to invest in the purchase or construction of a new house property before the tax filing due date. In such cases, the capital gain deposit account scheme can come to your aid. Under this scheme, public sector banks allow you to deposit the sale proceeds in a capital gain deposit account. You can deposit the amount in such accounts and then use the proceeds completely or partially to purchase or construct a residential house property within the stipulated timelines to claim tax exemption.