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Section 54F of the Income Tax Act, 1961, offers a significant tax advantage to taxpayers by providing exemption from capital gains tax when they invest the proceeds from the sale of a long-term capital asset (other than a residential house) into purchasing or constructing a new residential house. 

To claim this exemption, taxpayers must adhere to specific conditions, including the timely utilisation of the deposited amount in a Capital Gain Scheme account. 

This article explains the consequences of not utilising the deposited amount in a Capital Gain Scheme account and provides illustrative examples.

Overview of the Capital Gain Scheme Account:

When a taxpayer claims an exemption under Section 54F, they must ensure that the net consideration from the sale of the original asset is used to purchase or construct a new residential house. If the entire amount is not utilised by the date of furnishing the income tax return, the unutilized amount must be deposited in a Capital Gain Scheme account. This deposit must be made before filing the return and within the due date for filing the return under Section 139(1).

Consequences of Non-Utilization:

If the amount deposited in the Capital Gain Scheme account is not fully utilised for the purchase or construction of the new residential house within the specified period, the following consequences arise:

1. Taxability of Unutilized Amount:

• Capital Gain Reversal: The unutilized amount will be deemed as income under the head "Capital gains" in the previous year in which the three-year period from the date of the transfer of the original asset expires.
• Calculation of Excess: The tax liability will be calculated based on the difference between the capital gains initially exempted and the amount actually utilised for purchasing or constructing the new asset. The excess amount will be taxed as capital gains.

2. Withdrawal of Unutilized Amount:

• Scheme Withdrawal: The unutilized amount deposited in the Capital Gain Scheme account can be withdrawn according to the rules specified in the scheme.

3. No Consideration for Large Amounts:

• Excess Amount Exclusion: If the net consideration from the transfer exceeds ten crore rupees, the amount in excess of this threshold will not be considered for deposit or utilisation.

Illustrative Examples

Example 1: Partial Utilisation

Mr. Patel sold a commercial property for ₹42 lakhs (sale price is more than the stamp duty value), after excluding the expenses in connection with transfer of ₹2 lakhs, out of net consideration of ₹40 Lakhs , he claimed exemption under Section 54F by depositing ₹30 lakhs into a Capital Gain Scheme account. He purchased a new residential property for ₹25 lakhs within 2 years and the remaining ₹5 lakhs was left in the Capital Gain Scheme account.

In this case:

• Utilised Amount: ₹25 lakhs
• Unutilized Amount: ₹5 lakhs

Since the ₹5 lakhs was not utilised within the specified period, it will be deemed as taxable capital gains in the financial year in which the three-year period from the sale of the original asset ends. Mr. Patel will need to pay tax on this ₹5 lakhs as long-term capital gains.

Example 2: Full Utilisation with Unutilized Deposit

Mrs. Sharma sold out a plot of land, net consideration from which works out to ₹1 crore. He deposited ₹1 crore into a Capital Gain Scheme account and claimed exemption u/s 54F . She used ₹1 crore lakhs from the account to purchase the new property valued at ₹1.10 crore.

In this scenario:

• Utilised Amount: ₹1 crore
• Unutilized Amount: NIL 

Since, the entire amount is utilised within the time limit prescribed. There will be no additional tax liability.

Conclusion:

Failing to utilise the amount deposited in a Capital Gain Scheme account for purchasing or constructing a new residential house within the stipulated period can result in significant tax implications. The unutilized amount becomes taxable as capital gains, potentially leading to increased tax liability. Taxpayers must ensure timely utilisation of the deposited amount or be prepared to face the tax consequences. Regularly consulting with a tax advisor and maintaining meticulous records of all transactions can help manage and mitigate these risks effectively.

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Disclaimer:

The information provided in this article is for general informational purposes only and does not constitute professional advice. The Author recommends consulting with a qualified tax advisor or legal professional to obtain specific advice related to your individual circumstances. Tax laws and regulations are subject to change, and the application of these laws can vary based on individual situations.

The author is not responsible for any errors or omissions, or for the results obtained from the use of this information. In no event will we be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this article.