Summary:
Section 54F offers tax exemption on share-sale gains when invested in a residential house. Transferring a second house to an HUF may help meet the ownership condition, but clubbing rules, stamp duty and legal implications must be considered.
Taxpayers selling shares and buying a house can claim exemption under section 54F of the Income-tax Act, 1961. The equivalent section in the Income-tax Act, 2025 is section 86.
However, a taxpayer cannot claim exemption under section 54F if he/she owns more than one residential house, apart from the new house purchased with the proceeds of the share sale on the date of the share sale.
What To Do If A Taxpayer Owns Two Houses
One of the options for the taxpayer to consider is gifting one of the houses to his/her Hindu Undivided Family (HUF). If this is done, then the taxpayer would own only one house as an individual on the date of the share sale.
One of the methods of gifting is to impress the property with the character of HUF property (also called throwing the property in the hotchpotch of the HUF). This means that the individual ownership of the house is thrown into the HUF and the house becomes the property of the HUF. It must be noted that a HUF is not a distinct legal entity (although for the purpose of income-tax it is treated as such), and the karta of the HUF continues to hold the property in trust for the HUF.
This is different from a transfer of property from one individual to another where the ownership of the property is transferred from the transferor to the transferee. It is immaterial for the purposes of stamp-duty whether this is done by throwing into the hotchpotch or by executing a registered instrument of transfer. The question of whether stamp-duty would be payable on the transfer and how much would be payable is a debatable one. The taxpayer should consult a lawyer for the necessary advice in this regard. In addition, the taxpayer could also have the stamp authorities adjudicate upon the applicability and amount of stamp-duty payable.
Clubbing of Income Considered
Although throwing the property in the hotchpotch may allow the taxpayer to comply with the conditions of section 54F (as discussed earlier), it must be noted that the benefit of the exemption under section 54F may not be available if certain other conditions are not fulfilled. For example, if the property gifted to the HUF earns rent, it would be clubbed in the hands of the taxpayer who has impressed the property with the character of HUF property.
Similarly, the right to the property gifted to the HUF would be clubbed in the hands of the taxpayer if the taxpayer's spouse inherits the property from the HUF upon partition.
Check Out: How HUF help with Tax Savings
Thus, the taxpayer should be mindful of the clubbing provisions while considering this course of action. It is also important to consider the impact on stamp-duty discussed earlier.
