Important Keyword: Capital Gains Exemption, Income Heads, Income Tax, Section 54.
Table of Contents
Section 54: Capital Gain Exemption on Sale of House Property
When individuals decide to sell their residential property, they often do so for reasons like job changes, lifestyle adjustments, or retirement. While this transaction incurs capital gains tax, the primary motive isn’t usually profit-making but rather finding a more suitable home. Recognizing this, the Income Tax department offers Capital Gain Exemption under Section 54 of the Income Tax Act.
This provision allows taxpayers to reduce their Capital Gain Tax by fulfilling certain conditions. By meeting these criteria, individuals can claim exemptions on the sale of residential properties, providing them with financial relief during transitions in their lives.
Eligibility Criteria
To claim exemption under Section 54:
- Seller: Must be an Individual or HUF.
- Asset Sold: Must be a long‑term capital asset—land or building held for more than 24 months.
- New Purchase/Construction:
- Must buy within 1 year before or 2 years after the sale, or construct within 3 years after the date of transfer.
- One‑or‑Two House Rule:
- Normally, exemption applies when reinvesting in one residential house.
- If LTCG ≤ ₹2 crore, you can buy up to two houses once in a lifetime.
- Lock‑in Period:
- The new house must not be sold within 3 years of purchase/construction, or exemption will be reversed.
- Capital Gains Account Scheme (CGAS):
- If the new property isn’t bought on time, deposit gains into CGAS before the ITR due date; use the amount within prescribed time limits.
Revised Exemption Calculation
- Before FY 2023–24:
- Exemption = LTCG or investment, whichever is lower.
- If LTCG ≤ ₹2 crore, 2 houses allowed.
- After Finance Act 2023 (effective AY 2024–25):
- Cap of ₹10 crore: Even if you invest more, only up to ₹10 crore is considered for exemption.
- Example: LTCG ₹15 cr + New house cost ₹15 cr → Exemption = ₹10 cr; ₹5 cr taxable.
- If new house sold within 3 years:
- The exempted amount is added back to income and taxed.
Example: Jayni sold a house property in FY 2023-24 for ₹40 crores, purchased in FY 2016-17 for ₹20 crores. She bought a new house property worth ₹18 crores in another city. Jayni’s deduction under section 54 is as follows:
| Particulars | Amount(₹) |
| Sales Consideration | 40,00,00,000 |
| Less: Purchase Price Index Cost of Acquisition (20,00,00,000*348/264) | (26,36,36,364) |
| Long-Term Capital Gains | 13,63,63,636 |
| New House Property Purchase Price | 18,00,00,000 |
| Section 54 Exemption Amount | 10,00,00,000 |
In this scenario, Jayni can claim an exemption of up to ₹10 crores since the house property was sold after April 1, 2023. However, taxes will be levied at a rate of 20% on the remaining amount exceeding ₹10 crores, which is ₹3,63,63,636.
Timeline Slice
| Task | Time Limit |
|---|---|
| Purchase (ready‐to‐move) | 1 year before → 2 years after sale |
| Construction | Within 3 years of sale |
| Lock‑in Period | Hold new house for at least 3 years |
| CGAS Deposit | Before ITR due date |
Significant Recent Judgments
1. ITAT Mumbai — April 2025
Couple sold two residential houses separately and jointly invested gains in a single property. ITAT held that each spouse can claim their share of exemption under Section 54 provided “all conditions are met.”
Implication: Gains from multiple sales can be exempted if reinvested into one house, with proportional claims per seller.
2. ITAT Mumbai — May 2025 (Business Standard)
Clarified that LTCG from multiple homes can still qualify, as long as they are reinvested into one residential property and other conditions are followed.
Consequences of Transfer of New House Property
The lock-in period of 3 years is applicable when a taxpayer claims an exemption under Section 54 of the Income Tax Act. Different scenarios can unfold:
Situation 1: If the taxpayer sells the new residential house within 3 years from the date of purchase or construction, and the cost of the new house purchased is less than the Capital Gains:
Consequences: The exemption under Section 54 is revoked. The entire sales value of the new house property becomes taxable as capital gains. In this case, the cost of acquisition is considered as NIL.
Situation 2: If the taxpayer sells the new residential house within 3 years from the date of purchase or construction, and the cost of the new house purchased is more than the Capital Gains:
Consequences: The exemption under Section 54 is withdrawn. However, the taxpayer can still claim the cost of acquisition (Total Purchase Price – Exemption u/s 54) while calculating capital gains.
Situation 3: If the taxpayer sells the new residential house after 3 years from the date of purchase or construction:
Consequences: The exemption under Section 54 remains intact. The taxpayer can claim the index cost of acquisition while calculating the capital gain on the sale of the house property. However, income tax on capital gains must be paid at the rate of 20%.
CGAS Scheme for claiming exemption.
If a taxpayer finds themselves unable to utilize the entirety or a portion of the sales consideration for purchasing or constructing a new property by the due date of submitting their Income Tax Return (ITR), they have the option to deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). By doing so, they can still claim an exemption for the amount already expended on the construction or purchase of the property, in addition to the amount deposited in CGAS.
However, it’s crucial to bear in mind that if the taxpayer fails to utilize the amount deposited in the Capital Gains Account Scheme within the stipulated time frame of 3 years, it will be treated as taxable income for the last year.
Essential Compliance Tips
- Track ownership at the time of sale—owning more than one other house (besides the new one) disqualifies the exemption.
- Avoid premature sale of the new house within 3 years.
- Cap limit: Do not rely on investments above ₹10 crore.
- CGAS usage: Deposit before return filing; use funds within time limits.
- Claim frequency: Section 54 can be used multiple times—whenever conditions are met.
- Documentation: Maintain sale deed, purchase deed, CGAS receipts, detailed ITR entries.
Frequently asked Questions
1: I sold my house and bought another one within 6 months. Can I claim exemption under Section 54?
Answer: Yes. If the new residential property is purchased within 1 year before or 2 years after the sale, you are eligible for exemption under Section 54, provided it’s a long-term capital asset (held >24 months).
2: Can I buy two houses and still claim exemption?
Answer: Yes, but only if your LTCG does not exceed ₹2 crore. This benefit can be claimed once in a lifetime. For gains above ₹2 crore, only one house qualifies for exemption.
3: I invested ₹15 crore in a new house after selling my old one. Can I claim full exemption on my ₹13 crore capital gain?
Answer: No. As per the Finance Act 2023, the exemption is capped at ₹10 crore, even if your investment is higher. In your case, ₹3 crore of LTCG will be taxable.
4: I sold two flats and used the entire gain to buy one house. Can I claim Section 54 exemption on both sales?
Answer: Yes. If both sales are long-term and you reinvest the combined gains into a single residential property, each seller (if co-owned) can claim proportional exemption under Section 54, per ITAT 2025 ruling.
5: I haven’t bought a house yet. Can I still claim exemption by depositing the sale amount somewhere?
Answer: Yes. You can deposit the unutilized sale amount into the Capital Gains Account Scheme (CGAS) before the due date of filing your ITR. But you must use the funds within 3 years, or else the unused portion becomes taxable.
6: What happens if I sell the new house within 3 years?
Answer: Exemption is revoked. Depending on the situation:
- If the new house cost < LTCG: Full exemption is reversed; cost of acquisition = NIL.
- If the new house cost > LTCG: Exemption is reversed; acquisition cost = Purchase price – Exempted amount.
7: My wife and I sold our jointly owned flat and bought a new one jointly. Can both of us claim exemption?
Answer: Yes. Both co-owners can claim exemption in proportion to their ownership and investment, provided all conditions under Section 54 are met.
8: Can I claim Section 54 exemption more than once in my lifetime?
Answer: Yes. There is no limit on how many times you can claim Section 54 exemption, as long as you meet all eligibility conditions each time. However, the two-house benefit (for LTCG ≤ ₹2 crore) is allowed only once.
Read More: Section 54F: Exemption on sale of LTCA
Web Stories: Section 54F: Exemption on sale of LTCA
Official Income Tax Return filing website: https://incometaxindia.gov.in/
