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Section 54 of Income Tax Act: Ultimate Guide to Capital Gains Exemption (AY 2025-26)

  • Farheen Mukadam
  • Jul 25
  • 14 min read

Understanding Section 54: Save Tax on Selling Your House

Selling a house often brings a large cash inflow, but it also creates a significant tax liability. This guide introduces Section 54 as a valuable tax-saving tool. Section 54 of the Income Tax Act, 1961, offers relief from long-term capital gains tax when an individual sells a residential property and reinvests the profit. This provision helps homeowners reduce their tax burden considerably. This guide will explain how you can become eligible for this exemption, what conditions you need to meet, and how to calculate and claim the benefit.


This article will cover:

  • The basics of the Section 54 exemption.

  • Eligibility criteria for claiming the benefit.

  • Timelines and conditions for reinvestment.

  • How to calculate the amount you can save.

  • Recent changes, including the Rs. 10 crore cap.


Are you wondering how to save tax on your property sale? This article delivers a complete breakdown of Section 54 of the Income Tax Act. For a broader perspective, it's helpful to start with an overview of understanding capital gains tax.

Table of content 

Decoding Section 54: The Basics of Capital Gains Exemption

What is section 54 of the Income Tax Act? It is a provision designed to provide tax relief. The primary purpose of section 54 is to encourage individuals to reinvest their profits from selling a home into another residential house. This rule applies specifically to the Long-Term Capital Gains (LTCG) generated from the sale of a residential property. This benefit is available only to Individuals and Hindu Undivided Families (HUFs), not corporations or firms.


The section 54 meaning is straightforward for taxpayers. If you sell a house you have owned for a long time, the government allows you to avoid paying tax on the profits, provided you use those profits to get a new house within a set timeframe. This makes it easier for people to change homes without losing a large part of their investment to taxes. The law, as stated in the Income Tax Act, 1961, offers a clear path for this exemption. Assistance from platforms like TaxBuddy can simplify this process.


Key takeaways of Section 54 include:

  • It applies to Long-Term Capital Gains from selling a residential house.

  • The person selling must be an Individual or a member of a HUF.

  • The exemption requires reinvesting the capital gain in a new residential house.

  • Strict timelines for reinvestment must be followed to claim the benefit.


Are You Eligible? Checking an Assessee's Eligibility for Section 54

To claim the section 54 eligibility, an assessee must meet specific criteria. The law provides this exemption only to Individuals and Hindu Undivided Families (HUFs). Other entities like companies, Limited Liability Partnerships (LLPs), and firms cannot claim this benefit.


The asset sold must be a residential house, and the income from it should be classifiable as 'Income from House Property'. A crucial condition for section 54 assessee eligibility is that the property must be a long-term capital asset. This means the owner must have held the property for more than 24 months before selling it. The holding period starts from the date of acquisition to the date of sale. For instance, if a house was purchased on April 15, 2022, it must be sold after April 15, 2024, to qualify as a long-term asset.


Here is a simple checklist for eligibility:

Criteria

Requirement

Assessee Type

Individual or HUF

Asset Sold

Residential House (Long-Term Capital Asset)

Holding Period (Sold)

More than 24 months

Understanding the definition of a long-term capital asset is key to this process.


The Nitty-Gritty: Essential Conditions for Claiming Section 54 Benefit

Fulfilling the section 54 conditions is absolutely essential to secure the tax exemption. These rules revolve around the reinvestment of the capital gains into a new residential property and the timelines associated with it.


Reinvestment in New Residential Property

The core section 54 conditions require the taxpayer to reinvest the amount of capital gains into a new residential house. It is not necessary to invest the entire sale amount, but investing the full capital gain can make the entire profit tax-free.


Timeline for Purchase of New Property

The timeline for section 54 has strict deadlines for purchasing the new property. The taxpayer must purchase one new residential house either one year before the date of selling the original property or two years after the date of sale.


  • Example 1 (Purchase Before Sale): If a house is sold on October 20, 2024, a new house purchased anytime after October 19, 2023, will qualify.

  • Example 2 (Purchase After Sale): If the same house is sold on October 20, 2024, the new house must be purchased before October 20, 2026.


Timeline for Construction of New Property

For those who choose to construct a new house under section 54, the timeline is longer. The construction of the new residential property must be completed within three years from the date of the original property's sale. The date of completion is typically proven through a completion certificate from the local authority or the date of possession. For example, if a property was sold on October 20, 2024, the construction of the new house must be finished by October 19, 2027.


Location of the New Property

The new residential house property must be situated in India to qualify for the exemption. Following an amendment by the Finance Act (No. 2) 2014, purchasing a property outside India is no longer eligible for the Section 54 benefit.


Restriction on Sale of New Property (Lock-in Period)

A critical lock in period for section 54 applies to the new property. The new house, whether purchased or constructed, cannot be sold within three years from its date of purchase or the completion of construction.


Important Note: If the new house is sold within this three-year lock-in period, the tax exemption originally claimed will be reversed. The previously exempted capital gain will be subtracted from the cost of the new house, leading to a higher taxable gain in the year of its sale.


Condition

Detail

Reinvestment

In one residential house in India

Purchase Timeline

1 year before or 2 years after sale

Construction Timeline

Within 3 years after sale

New Property Lock-in

3 years from purchase/construction completion

Knowing the precise date of transfer is crucial for these calculations.


Calculating Your Savings: How Section 54 Exemption is Determined

The section 54 exemption calculation is based on a simple principle. The amount of exemption is the lower of two figures: the long-term capital gain made from the sale, or the amount invested in the new residential property. Any part of the capital gain that is not reinvested becomes taxable.


Exemption Formula: Lower of (LTCG or Cost of New House)

Let's look at a few section 54 examples to understand how to calculate section 54 benefit.


  • Example 1: Full Reinvestment Mr. Sharma has a long-term capital gain of Rs. 60 lakh from selling his old house. He buys a new house for Rs. 70 lakh.

    • Capital Gain (LTCG): Rs. 60 lakh

    • Investment in New House: Rs. 70 lakh

    • Exemption: The lower of Rs. 60 lakh or Rs. 70 lakh, which is Rs. 60 lakh.

    • Taxable LTCG: Zero.


  • Example 2: Partial Reinvestment Mrs. Gupta has an LTCG of Rs. 60 lakh. She buys a new house for Rs. 45 lakh.

    • Capital Gain (LTCG): Rs. 60 lakh

    • Investment in New House: Rs. 45 lakh

    • Exemption: The lower of Rs. 60 lakh or Rs. 45 lakh, which is Rs. 45 lakh.

    • Taxable LTCG: Rs. 60 lakh - Rs. 45 lakh = Rs. 15 lakh.


Here’s a table summarizing these scenarios:

Scenario

Sale Price

Purchase Cost (Old)

LTCG

Investment (New)

Exemption

Taxable LTCG

Full Reinvestment

1 Cr

40L

60L

70L

60L

0

Partial Reinvestment

1 Cr

40L

60L

45L

45L

15L

You can use an online tool to calculate your capital gains before applying these rules.


Important Update: The Rs. 10 Crore Limit on Section 54 Exemption (AY 2024-25 Onwards)

A significant section 54 amendment was introduced by the Finance Act, 2023. This change is effective from the Assessment Year 2024-25 onwards. The finance act 2023 section 54 change places a cap on the exemption. If the cost of the new residential property is more than Rs. 10 crore, the investment amount considered for the exemption calculation will be limited to Rs. 10 crore.

New Rule: For the purpose of calculating the Section 54 exemption, the cost of the new house will be capped at Rs. 10 crore.


This section 54 10 crore limit prevents very high-value transactions from receiving unlimited tax benefits.

  • Example 1:

    • Capital Gain (LTCG): Rs. 12 crore

    • New House Cost: Rs. 15 crore

    • Investment considered for exemption: Capped at Rs. 10 crore.

    • Actual Exemption: Rs. 10 crore.

    • Taxable LTCG: Rs. 12 crore - Rs. 10 crore = Rs. 2 crore.


  • Example 2:

    • Capital Gain (LTCG): Rs. 8 crore

    • New House Cost: Rs. 12 crore

    • Investment considered for exemption: Capped at Rs. 10 crore.

    • Actual Exemption: The lower of LTCG (Rs. 8 crore) or capped investment (Rs. 10 crore), which is Rs. 8 crore.

    • Taxable LTCG: Zero.


It is important to be aware of the latest income tax changes when planning your property transactions.


Investing in Two Homes? Special Provision Under Section 54

The section 54 two houses provision offers a special benefit in certain cases. An assessee can invest their capital gains in two residential houses instead of one, but this comes with specific conditions. This option was introduced to provide more flexibility to taxpayers with smaller capital gains.


The conditions to claim exemption for an investment in two properties under section 54 are:

  • The total long-term capital gain from the sale of the original house must not exceed Rs. 2 crore.

  • This is a section 54 once in a lifetime option. An individual who uses this option cannot claim it again in any future assessment year.


For example, if a person earns a capital gain of Rs. 1.5 crore, they can choose to buy two separate houses, say one for Rs. 80 lakh and another for Rs. 70 lakh, and claim the full exemption of Rs. 1.5 crore. However, if the capital gain is Rs. 2.1 crore, this option is not available, and they can only invest in a single residential house to claim the exemption.


What if You Can't Reinvest Immediately? Understanding the Capital Gains Account Scheme (CGAS)

The capital gains account scheme (CGAS) section 54 provides a practical solution for taxpayers who cannot reinvest their capital gains before their tax return filing deadline. If the capital gain amount has not been used to purchase or construct a new house by the ITR filing due date, the unutilized funds must be deposited into a CGAS account with an authorized bank.


Proof of this deposit must be submitted with the income tax return to claim the exemption for that year. The funds deposited in the CGAS must then be used for purchasing or constructing the new house within the original timelines (2 years for purchase, 3 for construction from the sale date).

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If the money in the CGAS is not used within the specified period, the unutilized amount becomes taxable as a capital gain in the year the timeline expires. You can learn more about the due date of filing an Income Tax Return to ensure timely deposits.


Section 54 and Its Cousins: Comparing with Section 54F and 54EC

When discussing the section 54 vs 54f debate, it's crucial to understand their different applications. The Income Tax Act offers other similar exemptions, mainly Section 54F and Section 54EC, each serving a distinct purpose.


Understanding Section 54F: Exemption on Sale of Asset Other Than Residential House

Section 54F applies to long-term capital gains from selling any asset other than a residential house (like stocks, gold, or commercial property). The key difference from Section 54 is that for a full exemption, the entire net sale consideration, not just the capital gain, must be invested in a new residential house. Additionally, the taxpayer must not own more than one other residential house on the date of the sale.


Understanding Section 54EC: Exemption on Investment in Specified Bonds

The section 54 vs 54ec comparison highlights another path for tax saving. Section 54EC allows exemption on LTCG from selling land or a building by investing the gains in specific government-notified bonds, such as those from NHAI or REC. The investment must be made within six months of the sale, with a lock-in period of 5 years for the bonds and a maximum investment limit of Rs. 50 Lakhs per financial year.


Comparison Table: Section 54 vs. 54F vs. 54EC

The difference between 54 54f 54ec is best understood through a table.

Feature

Section 54

Section 54F

Section 54EC

Asset Sold

Long-term Residential House

Any Long-term asset (not a residential house)

Long-term Land or Building

Reinvestment In

One/Two Residential House(s) in India

One Residential House in India

Specified Bonds (NHAI, REC, etc.)

Amount to Invest

Capital Gains

Net Sale Consideration

Capital Gains

Max Exemption

Investment cost (capped at Rs. 10 Cr)

Investment cost (capped at Rs. 10 Cr)

Investment in bonds (Max Rs. 50 Lakhs)

Investment Timeline

1 year before/2 years after (purchase); 3 years (construct)

1 year before/2 years after (purchase); 3 years (construct)

Within 6 months from transfer

New Asset Lock-in

3 years for house

3 years for house

5 years for bonds

Ownership Restriction

None

Should not own >1 other residential house

Not Applicable


Paperwork Ready? Documents Needed for Claiming Section 54

Keeping the correct documents for section 54 is essential for a smooth claim process. Taxpayers must have clear proof to support their exemption claim in case of scrutiny by the tax authorities. These documents serve as the primary evidence for meeting all the conditions of the law.


The necessary proof for section 54 exemption includes:

  • Sale deed of the original property showing the sale price and date.

  • Purchase deed of the new property with payment details.

  • If constructing, proof of construction expenses like architect certificates and contractor bills.

  • Completion certificate for the new property, if constructed.

  • Bank statements reflecting the transactions for the new property.

  • Proof of deposit in the Capital Gains Account Scheme (CGAS), if applicable.

  • Copy of the Income Tax Return (ITR) where the exemption is claimed.


Organizing this paperwork in advance is a wise step. These are some of the essential tax documents to keep handy.


Claiming Your Due: Steps to Report Section 54 in Your ITR

Knowing how to claim section 54 in ITR is the final step in securing your tax benefit. The exemption must be formally claimed when you file your Income Tax Return for the year in which the property was sold. Individuals with capital gains typically need to file Form ITR-2.


To report section 54 in ITR, follow these general steps:

  1. First, accurately calculate the Long-Term Capital Gains from the sale of your house.

  2. Next, determine the exact amount of exemption you are eligible for under Section 54 based on your reinvestment.

  3. In the ITR form, navigate to the 'Capital Gains' schedule.

  4. Enter the details of the capital gain and the amount of exemption you are claiming under Section 54.

  5. If you have used the Capital Gains Account Scheme (CGAS), you must also provide the details of the deposit.

Accurate reporting is crucial, as errors can lead to questions from the tax department. For hassle-free filing, you can use TaxBuddy's ITR filing service.


Watch Out! Common Pitfalls When Claiming Section 54 Exemption

Claiming this exemption requires careful attention to detail, and there are several mistakes in section 54 claims that people frequently make. One common error is the incorrect calculation of the holding period, leading to misclassifying the gain as short-term instead of long-term. Another major pitfall is missing the strict timelines for reinvestment or for depositing funds into the CGAS.


To avoid section 54 issues, be cautious of these common section 54 pitfalls:

  • Investing in an ineligible asset, such as a commercial property.

  • Forgetting about the 3-year lock-in period and selling the new property too soon.

  • Failing to deposit the unutilized capital gain into a CGAS account before filing the ITR.

  • Maintaining poor documentation to support the claim.

  • Misinterpreting the Rs. 10 crore investment cap or the special rule for investing in two houses.


Steering clear of these common tax filing errors can save you from future tax demands and penalties.


Conclusion: Maximizing Your Tax Savings with Section 54

To make a section 54 conclusion, it is clear that this provision is a powerful tool for homeowners. It allows you to save a significant amount of tax on long-term capital gains, provided you follow the rules carefully. The key is to understand your eligibility, respect the strict timelines, and meet all the conditions for reinvestment.


Effective tax planning for section 54 requires foresight and attention to detail. From calculating the holding period to ensuring the new property is held for at least three years, every step matters. With recent changes like the Rs. 10 crore cap, staying updated is more important than ever.

Need capital gains tax help? Proper planning can make a world of difference. TaxBuddy's experts are here to assist you with your tax planning and ITR filing needs. Get in touch with us to ensure you make the most of every available tax-saving opportunity.


Frequently Asked Question (FAQs)

1. Can I claim Section 54 exemption if I sell an inherited property? 

Yes, you can claim the Section 54 exemption if you sell an inherited property. The exemption applies to long-term capital gains (LTCG) arising from the sale of residential property, irrespective of whether you inherited it or purchased it.


2. What if the new property is purchased in my spouse's or child's name? 

No, the property must be in your name to claim Section 54. If you buy the new property in your spouse's or child’s name, you will not be eligible for the exemption.


3. Can I take a home loan to buy the new property and still claim Section 54? 

Yes, you can take a home loan to buy the new property and still claim the Section 54 exemption. The exemption is applicable as long as the property is bought within the specified time frame (1 year before or 2 years after the sale) and meets all other criteria.


4. Is Section 54 applicable to Non-Resident Indians (NRIs)? 

Yes, NRIs can also claim the Section 54 exemption on the sale of a residential property, provided they meet the other eligibility criteria, including investing in a new property within the specified time frame.


5. What happens if I die after depositing money in CGAS but before buying the house? 

If you die after depositing the capital gains in the Capital Gains Account Scheme (CGAS) but before purchasing the new house, the money in the CGAS will be transferred to your legal heirs. They can still claim the Section 54 exemption by purchasing the new property in their name.


6. Can I renovate or make additions to an existing property and claim Section 54? 

No, the Section 54 exemption is available only if you purchase a new residential property. Renovating or making additions to an existing property does not qualify for the exemption.


7. Is indexation benefit available while calculating LTCG before claiming Section 54? 

Yes, indexation benefit is available while calculating long-term capital gains (LTCG) before claiming Section 54. The indexation is applied to adjust the purchase price of the property for inflation, which helps reduce the taxable gain.


8. Can I claim Section 54 if I book an under-construction flat? 

Yes, you can claim Section 54 if you book an under-construction flat, as long as possession of the flat is taken within 3 years from the date of sale of the original property. If the builder delays the possession, the exemption may be at risk.


9. What if the builder delays possession beyond 3 years? 

If the builder delays possession beyond 3 years from the date of sale of your original property, you will lose the Section 54 exemption, as the possession must occur within 3 years of the sale.


10. Is it mandatory to file ITR to claim Section 54 exemption? 

Yes, it is mandatory to file an Income Tax Return (ITR) to claim Section 54 exemption, as it is a part of your tax return. The exemption is not automatically granted and must be claimed through the ITR.


11. Can I claim Section 54 and HRA exemption simultaneously? 

Yes, you can claim both Section 54 exemption and House Rent Allowance (HRA) exemption simultaneously. The exemptions are for different types of income and tax benefits. Section 54 applies to the sale of a property and HRA applies to rent paid for a house.



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