Important Keyword: Capital Gain Exemption, Long Term Capital Asset, Section 54F.
Table of Contents
Section 54F: Exemption on sale of LTCA
Owning a residential house is a fundamental need for individuals, and the Government of India is dedicated to realizing the vision of “Housing for All.” In pursuit of this goal, the government has implemented several schemes aimed at making housing more affordable. Additionally, various tax exemptions have been introduced to facilitate these objectives. Section 54F stands out as one such provision offering relief for long-term capital gains.
Section 54F of the Income‑tax Act, 1961 grants taxpayers—individuals or Hindu Undivided Families (HUFs)—an exemption from long-term capital gains (LTCG) tax arising from the sale of any long-term capital asset other than a residential house, provided the net sale proceeds are reinvested in a new residential house within specified timeframes
Eligibility Conditions
To qualify for Section 54F, the taxpayer must satisfy all of the following:
- Asset Type: Sale must be of a long-term capital asset excluding residential property.
- Residential House Purchase/Construction:
- Purchasable within 1 year before or 2 years after the date of transfer, or
- Constructible within 3 years after transfer.
- Ownership Restriction: On the date of transfer, the taxpayer should not own more than one residential house, other than the “new asset”.
- Subsequent Purchases/Construction:
- Buying any additional house within 1 year, or constructing within 3 years, voids the exemption, making it taxable in the year of violation.
- Holding Requirement: The newly acquired property must not be sold within 3 years, or else the exemption is reversed.
- Capital Gain Account Scheme (CGAS): If the investment isn’t done by return filing due date, capital gains must be deposited in a CGAS and used within the same timelines. Any unused portion post time window becomes taxable.
Quantum of exemption under Section 54F
Under Section 54F, the amount of exemption is determined based on specific criteria:
- If the cost of the new residential house is equal to or greater than the net sale consideration of the original asset, the entire capital gain is exempt.
- If the cost of the new residential house is less than the net sale consideration of the original asset, only a proportionate amount of the capital gain is exempt. This is calculated as follows:
- Proportionate Exemption = Long Term Capital Gain * (Amount Invested in New Residential House / Net Sale Consideration)
For instance, consider Akash, who sold gold in FY 2022-23 for ₹16 crore, resulting in a net long-term capital gain of ₹12 crore. He subsequently invested ₹8 crore in a new residential house property. In this scenario, he can claim an exemption of ₹6 crore under Section 54F.
| Particulars | Amount (₹ in ‘000) |
| Net Sale Consideration | 160,000 |
| LTCG Computed | 120,000 |
| Cost of New Residential House | 80,000 |
| Exempt LTCG ( 6*(8/16)Cr.) | 60,000 |
Timeline Summary
- Purchase: Within 1 year before or 2 years after sale.
- Construction: Within 3 years after sale.
- Holding Period: Must retain the new house for at least 3 years to avoid reversal of exemption.
- CGAS Use: Any funds in CGAS must be utilized within the above timelines.
Consequences of Transfer of New House Property
If the new asset is sold before three years from its purchase or construction date, any long-term capital gain previously exempted under section 54F will become taxable as capital gains. Additionally, any capital gain resulting from the sale of the new residential house property will also be subject to taxation under capital gains.
Consequences of Purchasing or Constructing Another House Property:
If the taxpayer acquires another residential house within two years or constructs one within three years from the date of the original asset’s transfer, the long-term capital gain that was previously exempted under Section 54F will be liable to tax in the year in which such residential house is purchased or constructed.
CGAS Scheme for claiming exemption under Section 54F of the Income Tax Act
Under Section 54F, taxpayers can leverage the Capital Gains Account Scheme (CGAS) to avail exemptions. If a taxpayer cannot utilize the entire or partial sales proceeds for purchasing or constructing a new house property by the due date of submitting their Income Tax Return (ITR), they should deposit the funds into the Capital Gains Deposit Account Scheme (CGAS). By doing so, taxpayers can claim an exemption for the amount already spent on property purchase or construction, along with the amount deposited in CGAS.
However, it’s crucial to understand that if the taxpayer fails to utilize the funds deposited in the Capital Gains Account Scheme within the stipulated three-year period, the deposited amount will be taxable as income for the last year.
Key Amendment by Finance Act 2023
From 1 April 2024 (Assessment Year 2024‑25 onwards), a cap of ₹10 crore has been introduced on the cost of the new residential house for exemption purposes:
- If the cost exceeds ₹10 crore, the excess amount is ignored when calculating exemption.
- Any CGAS deposits above ₹10 crore are similarly ignored .
- If the new house is sold within 3 years, the earlier exempt gain (capped to ₹10 crore basis) becomes taxable .
Illustration: Net sale ₹20 crore, LTCG ₹15 crore, investment ₹15 crore in a ₹15 crore house → Exemption limited to ₹10 crore basis → Taxable capital gain: ₹5 crore.
Landmark Delhi High Court Ruling: Multiple Floors Count as One House
In May 2025, the Delhi High Court ruled that multiple floors in the same building count collectively as a single residential house for Section 54F. This means:
- Investing in multiple floors of one structure is allowed as one asset.
- Two connected individuals purchasing separate floors can both claim exemption.
This judicial clarification resolved prior uncertainty regarding “one house” interpretations.
Practical Example with Amendment & Ruling
- Sale: A ₹25 crore long-term capital asset → LTCG = ₹18 crore.
- Purchase: New house in June 2024 costing ₹12 crore (within 2-year limit).
- Exemption Cap: ₹10 crore only.
- Tax Planning: ₹8 crore LTCG becomes taxable; ₹10 crore exempt.
- Holding: Property must be held until at least June 2027, or exemption reversed.
- Complex Purchase: Buying two floors in same building (total ₹12 crore) qualifies as single house due to Delhi HC ruling.
Frequently Asked Questions
1: Can I claim exemption under Section 54F if I sell gold and buy a residential house?
Answer: Yes. Section 54F allows exemption on long-term capital gains (LTCG) from any capital asset (like gold, shares, land, etc.) except a residential house, if the net proceeds are reinvested in a new residential property within the specified timeframe.
2: I already own one house. Can I still claim exemption under Section 54F?
Answer: Yes, but only if you don’t own more than one residential house (excluding the new one being purchased) on the date of the original asset’s sale.
3: I sold land in January 2024. Can I claim exemption if I construct a house by December 2026?
Answer: Yes. Construction must be completed within 3 years from the sale date. If you meet this deadline, you can claim Section 54F exemption.
4: What happens if I buy another house within 1 year of claiming exemption?
Answer: The exemption under Section 54F gets revoked, and the earlier exempt LTCG becomes taxable in the year you buy or construct an additional house.
5: I sold shares for ₹20 crore and invested ₹15 crore in a house. How much LTCG is exempt under Section 54F after the 2023 amendment?
Answer: Due to the ₹10 crore cap introduced from April 2024, only ₹10 crore of the LTCG is exempt. The remaining ₹5 crore is taxable.
6: I haven’t bought a house yet. Can I still claim exemption if I deposit the proceeds in CGAS?
Answer: Yes. Deposit the unutilized amount into a Capital Gains Account Scheme (CGAS) before the due date of filing your ITR. But remember: if not used within 3 years, it becomes taxable.
7: I plan to buy two floors in the same building. Will that count as one house under Section 54F?
Answer: Yes. As per a 2025 Delhi High Court ruling, multiple floors in the same building count as one house, so you can claim full exemption (subject to the ₹10 crore cap).
8: I sold commercial property in April 2023 and bought a house in March 2022. Can I still claim exemption?
Answer: Yes. If you purchased the house within 1 year before the date of sale, it qualifies for exemption under Section 54F.
Read More: Section 54EC of Income Tax Act
Web Stories: Section 54EC of Income Tax Act
Official Income Tax Return filing website: https://incometaxindia.gov.in/
