Section 54F Unused Funds: Your LTCG Tax Exemption at Risk?

If you sold a non-residential asset and parked gains in a Capital Gains Account to buy a house later, but never completed the purchase, the entire tax exemption you claimed can be cancelled — and the taxman will come knocking.

Here's what happened: Section 54F lets you avoid Long Term Capital Gains tax if you reinvest sale proceeds from non-residential assets into a new residential property within specified deadlines.. Gains that cannot be immediately reinvested must be deposited in a Capital Gains Account Scheme (CGAS) at an authorised bank to preserve the tax exemption temporarily.. If the CGAS funds are not used to buy or construct a house within 2-3 years, the unutilised amount becomes taxable as LTCG in the year the deadline expires..

What you should do: Check your CGAS deposit date immediately — count 2 years for purchase or 3 years for construction from the original asset sale date, not the deposit date.. If you cannot reinvest in time, file a revised return proactively declaring the unutilised amount as LTCG before the Income Tax Department raises a demand notice.. Consult a chartered accountant about partial utilisation rules — you lose exemption only proportionally on the unused portion, not on the full gains if part was reinvested..

CGAS interest is fully taxable as 'income from other sources' every year — so you're paying tax on interest AND risk losing the original LTCG exemption if reinvestment fails. Double jeopardy.