NS Tax & Financial Services

Income-tax Act, 2025, Section 86 (Old Sec 54F): Capital Gains Exemption on Purchase/Construction of a Residential House

Section 54F allows an Individual or HUF to claim an exemption from Long-Term Capital Gains (LTCG) arising from the sale of a long-term capital asset other than a residential house, if the sale proceeds are invested in a residential house.

Key Conditions for Section 54F:

i) Eligible asset sold

It must be a long-term capital asset other than a residential house (held for more than 24 months). Common examples include:

Real Estate: Land (vacant or agricultural), commercial buildings, and shops.
Financial Assets: Listed or unlisted shares, mutual funds, and bonds.
Precious Assets: Gold, silver, and other forms of bullion.
Other Assets: Trademarks, goodwill, or machinery.

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) Ownership Condition

On the date of transfer of the original asset, the taxpayer should not own more than one residential house, excluding the new house being acquired. Further, the taxpayer should not purchase or construct another residential house within the specified period, i.e. 3 years.

iii) Required investment

- The whole amount of sale proceeds (not just the LTCG amount) must be invested.
- If the entire net sale consideration is invested:

Full LTCG exemption is available.

- If only part of the net sale consideration is invested:

Exemption = LTCG × (Amount Invested ÷ Net Sale Consideration)

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 land: ₹80 lakh
Indexed cost of acquisition: ₹20 lakh
Long-term capital gain: ₹60 lakh

If you invest ₹60 lakh in a residential house:

Exempt LTCG = ₹60 lakh × (₹60 lakh ÷ ₹80 lakh) = ₹45 lakh
Taxable LTCG = ₹60 lakh − ₹45 lakh = ₹15 lakh

Frequently Asked Questions (FAQs)

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

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

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

Not investing the entire net sale consideration for full exemption.
Missing CGAS deposit timelines.
Owning more than one residential house on the date of transfer.
Purchasing/constructing another residential house within the restricted period of 3 years.

3. Can I claim Section 54F for self-construction of a house?

Yes. Construction of a residential house within 3 years of the transfer qualifies. Proper documentation and evidence of construction should be maintained.

4. Is Section 54F available on sale of shares and mutual funds?

Yes. Long-term capital gains arising from the sale of shares and mutual funds can qualify for Section 54F provided all conditions are met.

5. Can Section 54 and Section 54F be claimed together?

Yes, in appropriate situations involving different eligible capital gains transactions, both provisions may be claimed subject to satisfaction of their respective conditions.

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

The capital gains that were not taxed earlier shall be deemed to be income chargeable as long-term capital gains in the tax year of the transfer.

7. What if I cannot utilise the money before filing my ITR?

The unutilized amount should be deposited in a Capital Gains Account Scheme (CGAS) before the applicable ITR due date to preserve the exemption claim.

8. What happens if I do not use the CGAS amount within 3 years?

The capital gains that were not taxed earlier shall be deemed to be income chargeable as long-term capital gains in the tax year of the transfer.

9. Is investment in two houses allowed under section 54F?

No. The exemption for section 54F requires you to reinvest the net sale proceeds into only one residential house.

10. Can I take a home loan and still claim Section 54F?

Yes. The Income Tax Act allows this deduction as long as you use the capital gains proceeds to invest in the new house, even if the rest of the property's cost is funded via a bank mortgage.

11. Can I purchase the new house before selling the original asset?

Yes. The house can be purchased up to one year before the transfer of the original asset.

12. Can I claim Section 54F if I own two houses?

No. If you own more than one residential house (excluding the new house) on the date of transfer, the Section 54F exemption is not available.

13. Can I claim Section 54F if I already own one house?

Yes. On the date of transfer, you can own one residential house (other than the new house being acquired) and still claim exemption. Owning more than one residential house makes you ineligible.

14. Can an NRI take advantage of Section 54F?

Yes. Just like resident Indians, NRIs are eligible for the exemption of section 54F.

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