NS Tax & Financial Services

Income-tax Act, 2025, Section 82 (Old Sec 54): Reinvesting long-term capital gains in another residential house.

Section 54 of the Indian Income Tax Act provides Long Term Capital Gains (LTCG) tax exemption when an individual or HUF sells a residential house property and reinvests the capital gain in another residential house. If capital gains do not exceed ₹2 crore, the taxpayer can claim an exemption for investment in two residential houses, but this option can be exercised only once in a lifetime.
Key Conditions for Section 54:

i) Eligible asset sold

- The asset must be a residential house property.
- It must be a long-term capital asset (held for more than 24 months).

ii) Investment timeline

The capital gains must be invested in the purchase of a residential house:

- - within 1 year before sale, or
  - within 2 years after sale
- OR construction of a residential house within 3 years after sale.

Capital Gains Account Scheme (CGAS)

If the amount is not utilised before filing the income tax return, it should be deposited in a CGAS account to retain exemption eligibility.

iii) Required investment

- The whole or part of the capital gains can be invested. If the capital gains exceed the investment, the amount of capital gains that exceeds such investment shall be taxed.
- If the capital gains are equal to or less than the investment, the whole of such capital gains shall not be taxed.
- Exemption = min(Capital Gain, Amount Invested)

iv) Maximum investment

- The maximum amount eligible for exemption is ₹10 crore in a financial year. If your capital gain exceeds ₹10 crore, the excess gain remains taxable.

v) Lock-in period

- The new house must be held for 3 years.
- If the new house is transferred within 3 years of its acquisition, the capital gains that were not taxed shall be deemed to be income chargeable as long-term capital gains in the tax year of its transfer.

Example:

Suppose:

Sale price of old house= ₹90 lakh
Long-term capital gain= ₹30 lakh
Amount invested in new house = ₹25 lakh

Then the exemption would be:

Exemption = min⁡(30 lakh, 25 lakh) = 25 lakh.

Exempt LTCG: ₹25 lakh
Taxable LTCG: ₹5 lakh

Frequently Asked Questions (FAQs)

1. Is the section 54 exemption allowed under the new tax regime?

Yes. Section 54 exemption is available under both the old and the new tax regimes.

2. Can an NRI take advantage of Section 54?

Yes. Just like resident Indians, NRIs are eligible for this exemption to reduce or eliminate Long-Term Capital Gains (LTCG) tax on the sale of a residential property in India.

3. Can I claim Section 54 if I already own other houses?

Yes. Section 54 does not impose a restriction based on the number of houses already owned by the taxpayer.

4. Can the new house be purchased jointly with my spouse?

Yes, you can purchase the new house jointly with your spouse and claim the deduction under Section 54, provided you are the one who funded the property. Various courts and Income Tax Appellate Tribunals (ITAT) have ruled that you are still eligible for the full exemption if you paid the entire consideration.

5. What happens if I sell the new house within 3 years?

The benefit of Section 54 may be withdrawn. The exempted capital gain can effectively reduce the cost of acquisition of the new property, resulting in a higher tax liability when the new property is sold.

6. Can I buy an under-construction property?

Yes. Under the Income Tax Act, purchasing a flat in an under-construction building is legally classified as construction, rather than a standard "purchase".

Since it is classified as construction, the new house must be completed and delivered (or construction must be finished) within 3 years from the date of the sale of your old property. Courts and Tribunals generally consider the date of physical possession to determine the construction completion date.

7. What if I cannot utilise the capital gains before filing my return?

You can deposit the unutilised amount in the Capital Gains Account Scheme (CGAS) before the applicable return filing deadline and utilise it later within the prescribed period.

8. Can I purchase a capital gain bond through my CGAS account?

No, you cannot directly purchase Capital Gain Bonds (such as Section 54EC Bonds) using the funds in your Capital Gains Account Scheme (CGAS) account.

The CGAS and Capital Gain Bonds serve two mutually exclusive tax-saving purposes under the Income Tax Act. The CGAS Accounts has been designed primarily for real estate reinvestments (Sections 54 and 54F) to give you extra time to buy or build a new house.

9. Can I claim exemption if I take a home loan for the new house?

Yes. The exemption depends on the cost of the new residential house and not necessarily on the source of funds. Even if a home loan is used, exemption may be available subject to compliance with Section 54 conditions.

10. Can I invest in two houses?

Yes, if the LTCG does not exceed ₹2 crore, you may invest in two residential houses and claim an exemption. But this option can be exercised only once in a lifetime.

11. Is there a maximum exemption limit?

Yes. The exemption under Section 54 is capped at ₹10 crore.

12. Can I buy a house outside India and claim exemption?

No. The new residential house must be located in India.

13. Can I buy land to take benefit of section 54?

Yes, you can buy land to take the benefit of Section 54, but only if you plan to construct a residential house on it. Simply buying a vacant plot of land without building a house on it within the specified timeframe does not qualify for this exemption. The cost of the land plus the cost of construction, put together, will be considered towards the investment requirement.

14. What is the most common mistake taxpayers make under Section 54?

The two most frequent reasons for denial of Section 54 exemption are:

Failure to deposit unutilized funds in CGAS on time, and
Missing the purchase/construction deadlines.

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