Buying houses in India by becoming NRI? Save lakhs of taxes on selling mutual funds, understand the complete mathematics of Section 54F

When non-resident Indians (NRIs) living abroad decide to buy property in their homeland, they often raise capital by selling their past investments in India—especially equity mutual funds and shares. Equity funds in India are subject to 12.5% ​​long-term capital gains (LTCG) tax and direct TDS deduction at the time of redemption. If a portfolio has made huge profits, this tax liability can reach into lakhs of rupees. However, the Income Tax Act Section 54F There is a legal provision under (Section 54F), by using it properly, NRIs can reduce the entire tax on selling their mutual funds to zero.

Under Section 54F of the Income Tax Act, any person (whether resident or NRI) who sells any non-residential long-term capital asset (such as equity mutual funds, shares, gold or commercial property) and invests the proceeds in buying or constructing a new residential house in India, is exempted from long-term capital gains tax.

Unlike Section 54 (which is available only on selling a house and buying another house), the most important difference in Section 54F is that here it is not just the ‘capital gain’ but the profit received from the mutual fund. Net Sale Consideration Has to invest in a new house:

• Full Exemption: If you invest the entire net sale value of the mutual fund in the new house, your entire capital gain will be tax-free.

• Proportionate Exemption: If you invest a partial amount instead of the entire amount, the tax exemption will be available in the same proportion:

  
  

  $$\text{Rebate amount} = \text{LTCG} \times \left( \frac{\text{Investment in new house}}{\text{Total net sale amount}} \right)$$

The Income Tax Department has set strict conditions and deadlines to avail the benefit of Section 54F:

1. Timeline for purchase or construction:

   
   

   • From the date of sale of newly constructed house mutual fund 1 year ago Or within 2 years Must be purchased.

   • If you are constructing a house (or have booked an under-construction flat), from the date of construction sale. within 3 years Must be complete.

2. Limit on existing assets:

   
   

   • On the day the mutual funds are sold, you own (other than a newly purchased house) multiple residential buildings Should not be in your name.

3. The new house must be in India:

   
   

   • This exemption is applicable only for residential property located within the geographical limits of India. This benefit is not available when buying a house abroad.

4. Cap Limit:

   
   
   

5. Lock-in period of 3 years:

   
   

   • After the purchase or completion of construction of a new house purchased under the exemption. Cannot be sold within 3 years. If it is sold, the tax waived earlier will be reapplied.

Unlike resident Indians, when an NRI redeems a mutual fund, the fund house (AMC) deducts TDS by law even before making the payment. There is an immediate deduction of 12.5% ​​(plus surcharge and 4% cess) on equity funds. There are two main ways to get this TDS back:

• Lower Deduction Certificate (Form 13 / Section 197): Before selling mutual funds, you can get a certificate of low or zero TDS by filling Form 13 on the Income Tax Department portal. TDS will not be deducted on handing it over to the fund house.

• TDS refund by filing ITR: If TDS has been deducted, claim exemption under Section 54F while filing your ITR in India at the end of the financial year and get the full refund of the deducted TDS back in your NRO/Bank account.

If you have sold mutual funds but the house registration or full payment has not been made by the due date of filing income tax return (usually July 31), deposit the remaining sale amount in a nationalized or authorized bank. Capital Gains Account Scheme (CGAS), 1988 It is mandatory to deposit under. The amount deposited in this account is considered invested in the house and you can claim exemption. Later, payment can be made from this account only to the house builder or builder/seller by cheque.