Two houses and a share sale: Can an HUF transfer help claim 54F exemption?

I plan to sell shares and use the proceeds to claim exemption under Section 54F. However, I have two house properties registered in my name. If I transfer or gift one to the HUF (where I am the karta), can I claim Section 54F exemption? What is the correct, lawful process to transfer the property? Will the HUF need to pay stamp duty?

—Name withheld on request

At the outset, as you are selling shares and not a residential house, the exemption for reinvestment in residential property would be covered under section 54F (section 86 of the Income Tax Act, 2025). As you rightly pointed out, the exemption under section 54F is not available in case you own more than one residential house as on the date of the sale of shares.

Typically, taxpayers gift one of the properties to a relative before the date of the sale of the asset for which the exemption is sought to be claimed. If the property is impressed with the character of property belonging to the family (in other words thrown into the hotchpotch of the HUF as property of the family), the income arising from the property (say in the form of rent) is clubbed in the hands of the individual who impressed such property (in this case, you) and not in the hands of the HUF.

However, it is only the income from the property which would be clubbed in your hands and it would still be considered as a property transferred by you to the HUF. Accordingly, you may be able to claim exemption under section 54F, as you would own only one residential property on the date of sale of shares.

It may also be highlighted that clubbing provisions may also apply in your hands if the property (or part of it) is transferred to your spouse on partition of the HUF.

Generally, as HUF is not a separate legal entity (although a separate person for tax purposes), you, being the karta of the HUF, would continue to hold the property on behalf of the HUF, resulting in no change in the legal owner.

You may therefore examine the possibility of making a declaration that the property owned by you in your individual capacity is now being converted into and is now held by you as the karta of the HUF.

As regards applicable stamp duty, the matter appears to be debatable, and it is therefore recommended that you either take proper legal advice, or get the document adjudicated by the stamp authorities before execution.

Mahesh Nayak, chartered accountant, CNK & Associates.