Leverage the power of gifting: Use capital gains to buy a dream home

How transfers to spouse or other family members via gift deeds can impact Section 54F exemption, tax benefits.

- Shipra Singh

If you plan to use profits from shares, mutual funds, land, or commercial property to buy a dream home, Section 54F offers tax exemption. However, you cannot own more than one residential property at the time of selling the asset whose profits will be reinvested.

If you already own two residential properties but wish to buy a third for your child or parents, transferring one property or non-residential assets to family members might help.

For instance, Ashish owns two apartments, land, and shares. He wants to sell the land and shares to buy a flat for his daughter. How can he qualify for the Section 54F exemption?

Ashish transfers an apartment to his wife via gift deed. On making this transfer, Ashish is left with one apartment in his name, which, as per the Income Tax Act, makes him eligible to claim exemption under 54F. However, professionals warn that such transactions are highly litigative.

Sujit Bangar, founder, Taxbuddy.com, explained: "Since the original owner (Ashish) entirely paid to buy the residential property, they will still have beneficial ownership of that property. This is the reason clubbing provision also applies to income arising from gifts given to spouses. So, the claim of 54F exemption will most likely be rejected."

Tax laws don't forbid such transfers, but they are likely to face scrutiny by tax officers. Courts have had mixed views on property transfers to spouses or relatives to reduce the number of properties in a taxpayer's name, said Bangalore-based Chartered accountant Prakash Hegde.