Moved abroad, selling mutual funds to buy a house in India? Know the tax rules

I left India in February this year and moved to Luxembourg for a job. I sold my MF holdings just last month and want to use the sale amount to buy a house in Delhi. Will I qualify for Sec 54F exemption? What are the conditions?

—Name withheld on request

Section 86 of the Income-tax Act, 2025 (corresponding to erstwhile Section 54F of the Income-tax Act, 1961) provides deduction to an individual or a Hindu Undivided Family (HUF) against Long Term Capital Gains (‘LTCG’) arising from transfer of a long-term capital asset (not being a residential house property), where the net consideration is invested in a residential house in India, subject to the prescribed conditions.

Since the asset transferred in your case is mutual fund units, the deduction may be evaluated, provided the mutual fund units qualify as long-term capital asset and other prescribed conditions are satisfied. The benefit is available to both resident and non-resident individuals.

We have listed below certain key conditions to be satisfied while claiming the deduction:

1. Deduction is available where the taxpayer purchases one residential house in India within one year before or two years after the date of transfer of the original asset, or constructs one residential house in India within three years from the date of transfer.
2. If the entire net sale consideration is invested in the new residential house, the entire long-term capital gain may qualify for exemption. Where only a portion of the net sale consideration is invested, the exemption would be available on a proportionate basis.
3. If the net consideration is not fully utilized for purchase or construction of the new residential house before filing the return of income, the unutilized amount should be deposited under the Capital Gains Account Scheme (CGAS) on or before the due date of filing the return in order to preserve the exemption.
4. For computing the exemption. the cost of the new residential house and net consideration taken into account are capped at ₹10 crore.
5. The new residential house acquired for claiming the exemption should not be transferred within three years from the date of its purchase or construction. If it is transferred within this period, the exemption claimed earlier may become taxable.
6. Further, the exemption is subject to several other conditions, including:

• The taxpayer should not own more than one residential house, other than the new residential house in respect of which exemption is claimed on the date of transfer of the mutual fund units;
• If you purchase another residential house (other than the new residential house) within one year from the date of transfer of the mutual fund units or construct another residential house within three years from the date of transfer, the exemption claimed under Section 86 may become taxable in the year of such purchase or construction.

Accordingly, you may claim exemption under Section 86 (erstwhile section 54F of income tax act 1961) on the long-term capital gains arising from the sale of your mutual fund investments by reinvesting the eligible sale consideration on a residential property in Delhi, subject to satisfaction of all the prescribed conditions.

Also, any implications of such sale in Luxembourg should be reviewed separately.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.