Depreciable Building, Land Sale, Section 54F and the New LTCG Rate
Mr. Mehta, an individual proprietor, sold two assets in FY 2024-25. First, on 1 December 2024, he sold a factory building used in his business for ₹40,00,000. The building was part of a block of depreciable assets whose written down value at the beginning of the year was ₹15,00,000; there was no other asset in the block. Second, on 15 January 2025, he sold a plot of land purchased in January 2010 for ₹10,00,000 for ₹80,00,000. He invested ₹50,00,000 in a new residential house in March 2025. On the date of transfer of the land, he already owned one other residential house. He has no other capital gains or losses. The cost inflation index is 167 for FY 2010-11 and 363 for FY 2024-25. He is confused whether the factory building gives short-term or long-term gain, and how section 54F and the new LTCG rate apply.
1. Characterise the sale of the factory building and compute the capital gain. Is it eligible for exemption under section 54F?
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The factory building is a depreciable asset forming part of a block of assets. Under section 50, any gain or loss on transfer of such an asset is treated as a short-term capital gain or loss, regardless of the holding period. Since the block had a written down value of ₹15,00,000 and the sale proceeds were ₹40,00,000, the deemed short-term capital gain is ₹40,00,000 − ₹15,00,000 = ₹25,00,000.
Section 54F applies only to long-term capital gains arising from transfer of an asset other than a residential house. A short-term capital gain under section 50 is not eligible for section 54F. Therefore the ₹25,00,000 is taxable as short-term capital gain and is not exempt under section 54F.
2. Compute the LTCG on the land under both options available to a resident individual and recommend the beneficial option. Then compute the section 54F exemption and taxable LTCG under that option.
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For a resident individual transferring land acquired before 23 July 2024, the LTCG may be computed at 20% with indexation or 12.5% without indexation, whichever is beneficial.
Option 1: 20% with indexation. Indexed cost = ₹10,00,000 × 363/167 = ₹21,73,653. LTCG = ₹80,00,000 − ₹21,73,653 = ₹58,26,347. Section 54F exemption is proportionate because only ₹50,00,000 is invested against net consideration of ₹80,00,000: ₹58,26,347 × 50/80 = ₹36,41,467. Taxable LTCG = ₹21,84,880. Tax at 20% = ₹4,36,976.
Option 2: 12.5% without indexation. LTCG = ₹80,00,000 − ₹10,00,000 = ₹70,00,000. Section 54F exemption = ₹70,00,000 × 50/80 = ₹43,75,000. Taxable LTCG = ₹26,25,000. Tax at 12.5% = ₹3,28,125.
Option 2 is beneficial. Section 54F conditions are satisfied: he owns only one other residential house, the new house is purchased within two years, and the exemption is proportionate because the investment is less than the net consideration.
3. What happens if Mr. Mehta sells the new residential house in November 2027? What if he had purchased two residential houses instead of one?
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Under section 54F(3), if the new residential house is transferred within three years of its purchase, the exemption granted earlier is withdrawn. The amount of exemption is treated as LTCG of the year in which the new house is sold. November 2027 is within three years from March 2025, so the section 54F exemption would be reversed and taxed as LTCG in FY 2027-28.
Section 54F permits investment in one residential house. If Mr. Mehta had purchased two residential houses, he would not be entitled to section 54F exemption on that investment. The exemption cannot be multiplied by purchasing more than one house under section 54F.