M-40, and wife is 33. She is working too. I have been investing in mutual funds for last 7 years. Invested - 6.5L, Current value -10L. Now I am purchasing a land property.For the down payment , I intend to withdraw this money. I own 1 other residence for which no outstanding loan.My queries, 1) Can I claim LTCG tax exemption if I use the entire amount of 10L for purchase ? Or is there a limit ? 2) Will my LT capital gain be 10L or the difference of 3.5L ? 3) My wife does not own any other property, so can we proceed with purchase with her as the first owner , for tax exemption?

Ans: You will have to pay LTCG on old property sale @ 20% with indexation which would ~7.6L

Sec 54F benefits are applicable for second property. Since you already have 4 properties in your name I believe you won't be eligible to claim benefit from LTCG accruing out of MF sale transferred to acquire RE property, however suggest you seek alternate opinion from CA.

Ans: (A). Let's first talk about F/Y 2023-24 :
You jointly sold a Property during the year for Rs.76.80 lakhs (64.80+10.00+2.00), & sold the same for Rs.100.00 lakhs.
You have jointly also purchased Property No.3 (I suppose it is Residential only), for Rs.140.00 lakhs.
You should avail exemption u/s-54 & file your ITR accordingly. Please disclose all details about sale & purchase in your ITR.
02. Now coming to the F/Y 2024-25 :
You intend to Sell Property No.2, which was acquired in 2023-24. Any Gain on Sale of it would be Short Term capital Gains & taxed accordingly.
Alternatively, you may hold this sale of property no.2 (for 2 years from its purchase) & avoid STCG
You are free to utilize the sale proceeds in a way you like, including paying off your housing Loan.
Please note to avail exemption u/s 54 only from investment in property no.3 & not 2.
Most welcome for any further clarifications. Thanks.

Ans: Your goal is quite reasonable: you wish to liquidate long-held equity mutual funds and channel the proceeds into buying a residential plot and building a house (for your own use), so as to mitigate the LTCG tax. This requires careful alignment with tax law, and you must evaluate risks and constraints. Below is a 360-degree view — advantages, constraints, conditions, alternatives, and cautions — from the standpoint of a Certified Financial Planner.

» Legal framework for LTCG exemption when investing in residential property

To assess whether your plan can secure exemption (or reduction) of LTCG tax, you must consider the provisions in the Income Tax Act relevant to reinvestment in house property. The relevant section is Section 54F, which is the gateway when you sell long-term capital assets (other than a residential house) such as equity mutual funds, and reinvest in a residential house.

Key conditions under Section 54F:

The asset sold (equity mutual funds) should qualify as a long-term capital asset, so that gains are taxed under LTCG rules.

The net sale consideration (after deduction of expenses like brokerage or applicable taxes) must be reinvested in a residential house (purchase or construction) within specified timelines.

For purchase: you must acquire a residential house within one year before or within two years after the date of transfer of the capital asset.

For construction: you must complete the construction of a residential house within three years from the date of transfer of the original asset.

On the date of transfer of the original asset, you should not own more than one residential house (excluding the new one you propose to build).

If you invest less than the full limit, the exemption is proportionate: exemption = (Capital Gains × Cost of New House) ÷ Net Sale Consideration.

If you later sell or transfer the new property within three years of its purchase or construction, the exemption claimed earlier may get reversed (i.e., that amount becomes taxable).

Also, the Finance Act 2023 introduced a cap: if sale proceeds (net consideration) exceed Rs. 10 crores, then the excess over Rs. 10 crores is ignored for computing exemption.

These conditions mean that to get full exemption, you must reinvest essentially the entire net proceeds into the new residential property, and satisfy all timelines.
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One more complicating point: because you already own a house (occupied by your children), the condition “on date of transfer you should not own more than one residential house” becomes critical. Many tax experts interpret that to mean you cannot have another residential house (other than the one you are constructing) at that moment. Some recent commentary suggests that owning one house may disqualify full exemption under 54F.

Therefore, your existing house may be a hurdle in claiming full exemption.

» Specific risks and constraints for your situation

Given your situation, these are the critical risks or limitations:

Ownership of existing house: As mentioned, because you own a house already (even if occupied by children), you may fail the “not owning more than one house” test on the date of sale of mutual funds. This may disqualify you from full exemption under 54F.

Timing mismatch: You plan to build over 2–3 years. But the law allows only three years to complete the new house (from date of sale). Any delay beyond that may result in loss of exemption.

Partial reinvestment: If you cannot reinvest the full net sale proceeds (say you use part of it for something else), the exemption will be proportional, leaving some gains taxable.

Construction risk: Many real projects face delays, cost overruns, legal or municipal approvals. Any delay beyond three years can jeopardize tax benefit.

Liquidity risk: You must keep sufficient liquidity to complete construction within time, or risk losing exemption.

Income tax scrutiny: Your tax assessments must show clear tracing of funds, document utilization, and compliance. Any slip could provoke disallowance.

Exemption revocation: If you sell the newly constructed/ purchased house within 3 years, the exemption will be reversed.

Because these are real constraints, your plan must be stress-tested against delays, cost increases, legal hurdles, and tax ambiguities.

» Evaluation of your plan: pros and cons

Here is a downside-balanced evaluation:

Pros (what works in your favour):

The equity mutual funds are long-held, so their gains come under LTCG rules (12.5% for gains over Rs. 1.25 lakh) instead of income tax slab.

Section 54F offers legal exemption (or partial) if you reinvest in residential house property and meet conditions.

If you succeed, this route lets you retain equity exposure to your house (a home you live in) rather than paying full tax.

The “construction” route gives you time (up to 3 years) to complete building.

Cons / threats:

Your existing house is a major constraint under the “no more than one house” rule. That may disqualify or limit benefit.

Delays in construction or approvals may breach the 3-year timeline.

Partial use of sale proceeds for other needs reduces exemption proportionately.

Tax risk of disallowance is significant, especially with ambiguous facts.

If you underutilize or redirect funds later, you may lose exemption.

Given these, your plan is risky, not guaranteed. It is possible, but must be executed with extreme discipline, buffer, and documentation.

» Alternative or backup strategies you should consider

Since your plan is not foolproof, it is prudent to consider fallbacks or complementary routes. Here are alternatives:

Sell equity MFs gradually but not all at once, so you reduce tax burden year by year rather than triggering a very large LTCG in one year.

Use capital gains account scheme (CGAS): deposit gains in CGAS by filing ITR, then withdraw for construction when needed. This preserves the exemption window even if you don’t immediately invest.

Offset gains with capital losses: If you have any carried forward losses (from other assets), use them to offset gains.

Invest part in 54EC bonds (capital gains bonds allowed by tax law) for the portion you cannot invest in the house.

Restructure your existing house tenure: If you can dispose (sell or gift) your current residential property before the sale of MFs, that might help satisfy the “not more than one house” rule. But this has its own complexities and costs.

Stagger construction: Start with portion of plot, or phased construction, so that you can claim exemption on the portion completed within 3 years.

Use joint ownership carefully: In some cases, courts have allowed multiple floors in the same building to be treated as one house for tax exemption purposes. (A recent Delhi HC judgment: owning multiple floors as part of same building can be treated as a single property for Section 54F).

Hold off selling until a tax year when your income is lower, so LTCG rate is less burdensome.

Plan contingency reserves so that cost overruns do not derail compliance.

Each of these has pros and cons; they are not perfect substitutes, but useful in risk mitigation.

» Practical steps you must take (process roadmap)

Here is a stepwise action plan to increase your chances of success:

Check your house-ownership status: Consult a tax lawyer/CA to see whether your current house disqualifies 54F in your case.

Calculate sale proceeds, expected gain, reinvestment required: Estimate net sale proceeds after costs and how much you must plow into the new property.

Select plot carefully: Ensure clear title, approvals, permits, infrastructure, and no legal disputes.

Plan construction timeline: Engage architect/contractor to commit to finishing within 3 years.

Open CGAS if needed: Upon sale of MFs, deposit funds in this special account if you have not immediately applied them to house purchase / construction.

Maintain separate accounting: Trace and document every rupee from sale to investment into plot, materials, labour, etc. This is needed for tax audit.

File ITR on time with declaration of exemption under 54F: When you file ITR in the year of sale, claim the exemption and show relevant schedules.

Guard against disposing new house early: Do not sell the newly built property within 3 years. That will reverse exemption.

Review periodically: Monitor progress, check compliance deadlines, keep buffer funds.

If at any stage the plan looks in jeopardy (e.g. construction delays), you must either adjust or pay tax on the portion that fails exemption.

» Insight: likelihood and realistic expectation

Given your specific facts (you already own a house, and you aim to build over 2–3 years), the plan has a moderate-to-high risk of partial or full disqualification of exemption. The principal obstacle is the “owning existing house” clause, which is often interpreted strictly by tax departments.

Thus, you must approach this as a tax-mitigation attempt, not as a guaranteed exemption. Expect possibly only partial benefit, or that you may end up paying LTCG on some portion. However, if you execute flawlessly (within time, full reinvestment, no more than one house rule satisfied), you might gain significant tax advantage.

The alternative or backup strategies become your safety net. It is better to plan conservatively, rather than overextend relying on exemption.

» Final Insights

You are thinking in a smart and tax-aware way. Liquidating long-term equity and reinvesting in your own residence is logical. But do not assume automatic exemption. The existence of your current house is a serious obstacle under Section 54F.

If you can resolve that (e.g. by disposing your existing house, or structuring new home in a way acceptable to tax laws), your plan gains viability. You must absolutely ensure strict compliance with timelines, documentation, and fund tracing.

Parallel fallback strategies (CGAS, 54EC bonds, gradual selling) should be ready. If all goes well, the exemption can help you redirect capital gains into a home rather than paying tax.

If you like, I can run illustrative scenarios for your numbers and check feasibility in your state (Tamil Nadu) or check possible court precedents. Would you like me to do that?

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in

https://www.youtube.com/@HolisticInvestment