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, there is a legal provision under Section 54F of the Income Tax Act, by using it properly, NRIs can reduce the entire tax on selling their mutual funds to zero. What is Section 54F and how does it work for NRIs? 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 the entire net sale consideration from the mutual fund has to be invested in the new house, not just the 'capital gain': 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 part amount instead of the entire amount, the tax exemption will be in the same proportion: $$\text{Exemption Amount} = \text{LTCG} \times \left( \frac{\text{Investment in New House}}{\text{Total Net Sale Amount}} \right)$$ Description Example Amount Net Consideration of Mutual Fund ₹1,00,00,000 (1 Crore) Original Cost (Cost of Investment) ₹40,00,000 (40 Lakh) Long-Term Capital Gain (LTCG) ₹60,00,000 (60 Lakh) Tax in normal circumstances (12.5% + cess) Approx ₹7,80,000 (7.8 Lakh) Tax on investment of entire ₹1 crore in a new house (U/s 54F) ₹0 (Nil) Time limit and mandatory conditions Section The Income Tax Department has set strict conditions and deadlines to avail the benefit of 54F: Timeline for purchase or construction: The newly constructed house should be purchased within 1 year or 2 years before the date of sale of the mutual fund. If you are getting a house constructed (or have booked an under-construction flat), the construction must be completed within 3 years from the date of sale. Limit on existing properties: You should not own more than one residential house in your name (other than a newly purchased house) on the day the mutual funds are sold. 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. Cap Limit: The maximum limit of investment and exemption under section 54F is limited to ₹10 crore. Lock-in period of 3 years: A new house purchased under the exemption cannot be sold within 3 years of purchase or completion of construction. If it is sold, the tax waived earlier will be reapplied. TDS and Refund Process for NRIs Unlike resident Indians, when an NRI redeems a mutual fund, the fund house (AMC) deducts TDS by law 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 a mutual fund, you can get a certificate of lower or nil 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. What to do if house registration cannot be done immediately? (CGAS Scheme) If you have sold mutual funds but the house has not been registered or the full payment has not been made by the due date of filing income tax return (usually 31st July), it is mandatory to deposit the remaining sale amount in a nationalized or authorized bank under the Capital Gains Account Scheme (CGAS), 1988. 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.
