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  7. Capital Gains Exemption Under Section 54

Section 54 of the Income Tax Act: Capital Gains Exemption Under Section 54

Updated on: 28 Apr, 2025 04:08 PM

Investing in property is still one of the most coveted investment strategies among individuals who are risk-averse and want high returns.

However, earning higher profits also comes with higher taxes. Capital gains, whether short-term or long-term, are subject to tax. In order to provide relief from capital gain tax, the Income Tax Act provides various deductions and exemptions. One such exemption is Section 54.

Under Section 54 of the Income Tax Act, if the seller of a residential property acquires or constructs another residential property from that amount, he or she gets benefits from capital gains tax.

In this article, let’s discuss Section 54 of the Income Tax Act, eligibility for section 54 exemption, and how to claim section 54 exemption.


Contents

Budget 2025 Updates

As per Budget 2025, the income tax rebate u/s 87A has been increased to Rs.60,000, making an income upto Rs.12 lakhs as tax-free under the new tax regime. However, this increased rebate is not applicable on special grade incomes such as ‘Capital Gains’.

What is Section 54 of the Income Tax Act, 1961?

Section 54 of the Income Tax Act provides exemption on long term capital gains from the sale of residential property if the proceeds from such sale are reinvested in purchasing or constructing another residential property within a specified time frame. Section 54F exemption is allowed only on long-term capital gains.

To claim this tax benefit, certain prescribed conditions need to be satisfied. Let’s explore them one by one in this guide.

What are the Different Types of Capital Assets Under Income Tax?

For capital gains, the assets are bifurcated into two major sections:

Short-term capital assets-

Capital assets that the individual holds for not more than 24 months are called short-term capital assets. The gains from selling these assets are called short-term capital gains.

Long-term capital assets-

The assets the assessee holds for more than 24 months are called long-term capital assets. The gains from selling these assets are called long-term capital gains.

If unlisted shares, land, or other immovable property are held for more than 24 months, it is considered a long-term capital asset.

The following assets shall be treated as long-term capital assets if they are held for more than 12 Months:

  • Listed securities
  • Units of Equity oriented fund
  • Zero-coupon bond

For Section 54 of the Income Tax Act, the house property should be held for more than 24 months to consider an asset as a long-term capital asset.



LTCG and STCG Rates in 2023-24 and 2024-25 - Comparison

Budget 2024, announced on 23rd July 2024, brought about certain changes in the long-term and short-term capital gains tax rates and holding periods. Given below is a table showing the comparison between the capital gains tax rates in FY 23-24 and FY 24-25.

Taxation for mutual funds

Product Before After
Period of holding Short Term Long Term Period of holding Short Term Long Term
Equity oriented MF units > 12 months 15.00% 10.00% > 12 months 20.00% 12.50%
Specified Mutual funds which has more than 65% in debt > 36 months Slab rate Slab rate > 24 months Slab rate Slab rate
Equity FoFs > 36 months Slab rate Slab rate > 24 months Slab rate 12.5%
Overseas FoF > 36 months Slab rate Slab rate > 24 months Slab rate 12.5%
Gold Mutual Funds > 36 months Slab rate Slab rate > 24 months Slab rate 12.5%

Note: The LTCG and STCG rates for FY 2025-26 is the same as FY 2024-25 as no changes in the tax rates were proposed in Budget 2025. However, slab rates have been revised in Budget 2024 under the new regime, applicable in case of short-term capital gains taxed at slab rates.

Who is Eligible to Avail of the Exemption Under Section 54?

According to this section, when an assessee sells a residential property, a long-term capital asset, and buys another residential house property, he or she can claim a taxation exemption. Given below are the conditions of eligibility for section 54 exemption.

  • Only individuals or HUFs are eligible to claim this benefit. The companies cannot reap the benefits of this section.
  • The house property the taxpayer is selling should be a long-term capital asset.
  • The property that is to be sold should be a residential house. Income from this property should be charged under the head income from the house property.
  • The new residential house property should be purchased either one year before the date of transfer or two years after the date of sale or transfer. In the case of constructing a new house, the individual is given an extended time period to construct a house, i.e., within three years of the date of transfer or sale.
  • The house property that is bought should be in India.

If the individual does not fulfill the above conditions, he or she is not liable to claim an exemption under Section 54 of the Income Tax Act. Only such transactions by the taxpayer are eligible for the exemption under Section 54 of the Income Tax Act.

Do you know?

The ₹10 crore cap on capital gains exemption is a major change impacting high-value property sales. Earlier, investors could reinvest unlimited capital gains into a new residential property to claim full tax exemption under Section 54. Now, any gains exceeding ₹10 crore will be taxable, restricting reinvestment options for HNIs and large investors.

Key Requirements for Claiming Section 54 Exemption

To avail the benefits under Section 54, the following conditions must be satisfied:

  • Nature of Asset:
    • The asset must be classified as a long-term capital asset.
    • The asset sold must be a residential house, with income chargeable under the head “Income from House Property.”
  • Timeline for Purchase or Construction:
    • The seller must purchase another residential house either 1 year before or 2 years after the sale/transfer of the original property.
    • For house construction, the seller has up to 3 years from the date of sale/transfer.
    • In cases of compulsory acquisition, the timeline starts from the receipt of compensation (original or additional).
  • Location of New Residential House:
    The new house must be located in India. Properties purchased or constructed abroad are not eligible for the exemption.
  • Exemption Limit:
    From 1st April 2023, the exemption amount under Sections 54 and 54F is capped at ₹10 crore. Previously, there was no upper limit.

Important Note:

All conditions listed above are cumulative. Failing to meet even one condition disqualifies the seller from claiming the exemption under Section 54.

How to Calculate Capital Gain Exemption Available Under Section 54?

Section 54 of the Income Tax Act allows the lower of the two as an exemption amount for a taxpayer:

  • Amount of capital gains on transfer of residential property or
  • The investment made for constructing or purchasing new residential property

The balance amount (if any) will be taxable as per the Income Tax Act.

With effect from Assessment Year 2024-25, the Finance Act 2023 has restricted the maximum exemption to be allowed under Section 54. In case the cost of the new asset exceeds Rs. 10 crore, the excess amount shall be ignored for computing the exemption under Section 54.

For Example, Mr. Anand sells his house property and earns a capital gain of Rs. 35,00,000. With the sale amount, he purchased a new house for Rs 20,00,000. The exemption under Section 54 will be the lower amount of Rs 20,00,000.

The capital gains that are liable for taxation will be the balance of both, which is Rs 15,00,000 ( 35,00,000-20,00,000).

Section 54 Exemption Chart

Changes Made under Section Sale of Sale amount invested in Exemption Amount
Section 54 Residential property New residential property 10 crores
Section 54F Any long-term asset other than residential property New residential property 10 crores
Capital Gains Tax Worries?

Provisions for Transfer of Property Under Section 54

If the new house is sold within a period of 3 years from the date of purchase/construction, then the exemption claimed will be reversed and become taxable in the year of sale. In this case, let’s consider 2 different scenarios -

Case 1. The cost of new house purchased is less than the capital gains calculated on the sale of property

When the new property is sold within 3 years of the date of purchase, the cost of acquisition becomes nil and the balance amount becomes taxable.

Example -
Mr.A sold residential property in May 2022 leading to a capital gain of Rs.30,00,000. He purchased a residential property in June 2022 for Rs.18,00,000.
The new residential property is sold in December 2023 for Rs.35,00,000.

Capital Gains in 2022:

Particulars Amount
Capital gain on transfer of residential house 30,00,000
Less: Investment made in residential house property 18,00,000
Taxable capital gains 12,00,000

Capital Gains in 2023:

Particulars Amount
Sale consideration 35,00,000
Less: Cost of acquisition Nil
Taxable capital gains 35,00,000

Case 2 - Cost of new house purchased is more than the capital gains calculated on selling the original house

If the cost of new asset is more than the capital gains, then the entire capital gain will be exempted. However, if the new property is sold within 3 years, then the capital gains will be taxable.

Example -
Mr.Z sold a residential property leading to a capital gain of Rs. 25,00,000 in June 2021. In October 2021, Mr.Z purchased a new residential house property worth Rs.40,00,000. In January 2023, he sold this new residential property for Rs.55 lakhs. Here’s how the taxable capital gains will be calculated -

Capital Gains for 2021 -

Particulars Amount
Capital gain on transfer of residential house 25,00,000
Less: Investment made in residential house property 40,00,000
Taxable capital gains Nil

Capital Gains for 2023 -

Particulars Amount
Sale consideration 55,00,000
Less: Cost of acquisition 15,00,000
Taxable capital gains 40,00,000

What is a Capital Gains Account Scheme?

If the assessee is unable to purchase or construct property before the due date of furnishing of return of income for the year of transfer and still wants to save tax, he or she can invest/deposit all the unutilized capital gain proceeds of the old house property in Capital Gains Deposit Scheme. In this way, the new property can be purchased later and the capital gains from the proceeds of the sale of old house property will not be taxable either.

The Income Tax Act specifies Various conditions for deposition in the Capital Gains Account Scheme. They are:

  • This can be done in authorized/approved bank branches. Rural branches of banks are not included.
  • The deposition has to be done before the due date for filing income tax returns.
  • The deposited amount has to be utilized to purchase/construct the house as per the provisions of the law.

Non-utilization of the amount deposited in the Capital Gain Account Scheme

Below are the regulations regarding non-utilization of the amount deposited in the Capital Gains Deposit Scheme by the assessee:

The amount deposited in the Capital Gains Deposit Scheme needs to be withdrawn for construction or the purchase of new house property within three years or two years after the date of transfer, respectively. If the assessee does not withdraw this amount within the stipulated time, then the amount of capital gains will be taxable in the hands of the taxpayer. Thus, the assessee has to pay capital gain tax on property.

What are the Consequences of Transferring the New House Property Within 3 years?

If the assessee buys or constructs a new house within the prescribed time limit after selling the old house property, which is a long-term capital asset, he or she can claim an exemption under Section 54.

Further, if he or she wants to sell the new property owned by him or her, the individual must hold the property for a minimum of three years as per section 54.

If he or she sells before the stipulated time, the benefit given to him or her will be withdrawn, and he or she has to pay the tax on capital gains exempted.

  • If the builder of the new residential construction fails to hand over the property to the taxpayer within three years of purchase, the exemption is still allowed.

If the new house property is sold within three years of its purchase/ construction, then two scenarios can happen. To calculate the taxability, there are two cases:

If the cost of the new house property is less than the capital gains calculated from the sale of the original house property.

In this case, the capital gain is exempt, while the property transfer will now be taxable, and the cost of acquiring new assets will be considered zero.

Case Study

Ms. Rekha had an LTCG of Rs.50 lakhs on a residential property in Jaipur in 2023. However, she was not ready to reinvest the LTCG amount to purchase a new property immediately and, therefore, was not able to claim the deduction under section 54F.

Upon consulting Tax2win’s tax experts, she found out that she can deposit the LTCG amount in a CGAS account until she is ready to reinvest it and claim the section 54 exemption. However, she must reinvest these funds within 2 years of depositing the amount to avail of the exemption. If she fails to do so, the exemption will be withdrawn.

Impact of the Finance Act 2023 on Section 54

The Finance Act 2023 introduced a significant change to Section 54 of the Income Tax Act, impacting the maximum exemption allowed for capital gains arising from the sale of residential property. Here's how it affects individuals:

  • Previous Rule: Before the Act, there was no limit on the amount of capital gain exemption one could claim under Section 54 by investing in a new residential property.
  • New Rule: Effective from the Assessment Year 2024-25 (April 1, 2024, onwards), the maximum exemption allowed under Section 54 is capped at Rs. 10 crore. This means:
    If the cost of the new residential property exceeds Rs. 10 crore, the excess amount invested will not be considered for exemption calculation.
    Only the portion of the capital gain up to Rs. 10 crore invested in the new property will be exempt from tax.

Tax Implications of Reinvesting the Leftover Amount Under Section 54EC

Section 54EC of the Income Tax Act, 1961 allows exemption from capital gains tax on the sale of a residential property if the gains are invested in specific long-term infrastructure bonds within six months from the date of sale. However, the remaining amount becomes taxable if the invested amount is less than the total capital gain. Here's how reinvesting the leftover amount affects your taxes:

Reinvesting Leftovers in Eligible Investments:

No Additional Exemption:

  • The exemption under Section 54EC is limited to the amount invested in the specified bonds.
  • Beyond the amount invested in bonds, the leftover capital gain will be taxed at applicable capital gain rates (short-term or long-term, depending on the holding period).

Not Reinvesting Leftover Amount:

  • The entire unutilized capital gain (leftover after investing in bonds) will be taxed at applicable capital gain rates.
  • Short-term capital gains (holding period less than 24 months) are taxed at 30% (plus surcharge and cess).
  • Long-term capital gains (holding period exceeding 24 months) are taxed at 20% with indexation benefit, effectively reducing taxable income.

Case Study

Mr.Arjun had long-term capital gains from the sale of a residential property worth Rs.25 lakh. He invested Rs.5 lakhs in specified bonds and claimed an exemption of the same under section 54EC.

He was looking for more ways to save taxes. He consulted an online CA. The expert suggested that he can invest the remaining amount for buying a residential property and claim a deduction for the remaining amount under section 54.

What are the circumstances in which exemption under section 54 can be withdrawn?

The exemption claimed by assessee under s ection 54 can be withdrawn in the following circumstances:

  • Amount deposited in capital gains scheme account is not utilized in prescribed time limit: Where the amount deposited is not utilized for purchasing a residential house property within 2 years or construction of house property within 3 years from the date of transfer, the un-utilized deposit in capital gain account scheme is deemed to be long-term capital gains in the year in which the prescribed time limit expires.
  • Transfer of new house within 3 Years: If the new house is sold before a period of 3 years from the date of its purchase/completion of construction, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under s ection 54 will be deducted from the cost of acquisition of the new house.

What is the Difference Between Section 54 and Section 54F?

The Income Tax Act states various tax exemptions against capital gains that save tax for the assessee. Two of the major capital gain exemptions are stated under Section 54 and Section 54F. Both state exemptions on long-term capital gains. There is a major difference between both the exemptions of the tax.

Section 54 Section 54F
  • Section 54 of the Income Tax Act states exemption on long-term capital gains for the sale of a residential property.
  • An entire capital gain needs to be invested to claim full exemption.
  • When all capital gains are not invested, the leftover amount is charged for taxation as long-term capital gains.
  • No rule is mandatory for the ownership of one or more residential properties.
  • If the individual sells the new residential house property within the period of three years from purchase, the exemption will be reversed, and the exempted capital gains will be taxed.
  • Section 54F can be claimed on long-term capital gains for the sale of any asset other than a residential property.
  • Entire net sale proceeds need to be invested to claim full exemption.
  • If the entire net sale proceeds are not invested, the exemption is allowed proportionally. In this case, the exemption will be as follows:
    • Exemption = Cost of the new house x Capital Gains/Net Sale Proceeds
  • One can not own more than one residential house at the time of the sale of an old asset.
  • If the individual sells the new property within the period of three years from the purchase/ construction of the new property or purchases another property within two years of the sale of the original asset other than the new house or constructs a new house within three years of the sale of the original property other than the new residential property, the exemption will be reversed. The exempted capital gains in such a case will be taxed as long-term capital gains.

Points to Note

  • The property that is purchased after selling should be bought in the seller’s name and not in any other name to claim the benefit.
  • When the cost of the new residential property is lower than the net sale proceeds of the original property, the exemption u/s 54F will be allowed proportionately. One can reinvest the leftover amount under Section 54EC within six months of the transfer, subject to other conditions, to save tax.

Few other examples for a better understanding of Section 54 of the Income Tax Act, 1961.

Mr Shekhar purchased a residential property in April 2014 and sold the same on 21st April 2019 for Rs 12,40,000. Capital gain arising on the sale of the house amounted to Rs 2,00,000. He purchased a new residential house in November 2018 for Rs 6,00,000. Can he claim the benefit of Section 54 with respect to the house constructed in November 2018?

Ans: The assessee purchased the new house property within the period of one year before the transfer of the old house property, which is 21st April 2019; hence, he qualifies for the exemption under Section 54. He can claim the benefit of section 54 with respect to his newly purchased house in November 2018.

Q- Mr. Kshitij purchased a residential property in April 2018 and sold the same property in April 2019 for Rs 10,40,000. Capital gains arising on the sale of the house amounted to Rs 2,00,000. Can he claim the benefit of section 54 by constructing another residential house from the capital gain of Rs 2,00,000?

Ans: The residential property, in this case, is a short-term capital asset as it is held for a period of less than 24 months. The benefit of Section 54 will not be available to Mr. Kshitij as the period of holding immovable property under this section is less than 24 months before the transfer.

Have you sold a property recently and earned capital gains? If yes, then you must know that these capital gains are subject to tax. However, there are various ways to save tax on your capital gains. If you are also looking to save your capital gain tax, look no further because our experts can help you maximize your tax savings by navigating the complex Income Tax Law to find the best possible tax saving options for you. Get Online CA Now to save capital gains tax.

FAQs on Section 54 of Income Tax Act

Q- Is the full amount received from the sale of property taxable?

No, the amount of sale consideration is not taxable. The amount of capital gain, which is calculated as per the prescribed calculation, is taxable if no exemptions have been claimed.

Q- Who pays TDS in case of the sale of a property?

Any person (Buyer or Transferee) who enters into an agreement with a resident seller for the transfer of an immovable property (land or building or both but not rural agricultural land) is required to deduct TDS @ 1% if the sale consideration or SDV is Rs. 50 lakh or more. Consideration includes all charges such as maintenance fees, car parking, club membership fees, electricity, water fees,

Q- Sale of which type of property can avail the benefit of exemption under section 54?

Exemption under section 54 is only allowed on the sale of a residential property, which is a long-term capital asset for the assessee.

Q- When does the taxpayer benefit under section 54?

When the assessee purchases a new residential house property within one year before or two years of the sale of the original house property or constructs a new house property within three years of the sale of the old property, he or she is liable to get benefit from the exemption under section 54.

Q- How much exemption is allowed under section 54?

Under section 54 of the Income Tax Act, the amount of capital gain on the sale of the original residential house property or the amount of new residential property, whichever is less, is completely exempt.

Q- What is the limit of long-term capital gain tax?

Each financial year, investors can get an exemption of up to Rs. 1 lakh on LTCG tax from selling shares or mutual fund units. By spreading their redemptions across two financial years, they can use the tax exemption limit for both years.

Q- Can we claim exemption under both 54 and 54F?

Sections 54 and 54F are independent and not mutually exclusive. Therefore, you can claim exemptions under both sections for investing in the same house. There is no restriction on claiming both exemptions simultaneously.

Q- Can I claim exemption US 54F for repayment of existing home loan?

Yes, exemptions under Sections 54, 54F, and 54EC are available for LTCG on the sale of house property. It is also mandatory to report the sale of the property in your ITR. Yes, you must disclose any gain or loss from the sale of property under the 'Income from Capital Gains' section.

Q- What did Budget 2024 propose in regard to removal of indexation benefits for properties?

The Budget 2024 has proposed removing indexation benefits on capital gains from the sale of long-term capital assets. Previously, property owners adjusted their purchase prices for inflation, reducing taxable profits. The tax rate on long-term capital gains for both financial and non-financial assets has been reduced from 20% to 12.5%. However, the indexation benefit for the sale of long-term assets has been removed. As a result, any sale of long-term assets after July 23, 2024, will be taxed at 12.5% without the indexation benefit.

Individuals can still use the fair market value (FMV) as the cost of acquisition for assets purchased on or before April 1, 2001, when selling these assets.

The amendment to Finance Bill 2024 announced the restoration of indexation benefits on immovable property purchased before 23rd July 2024 for individuals and HUFs only for the purpose of computing tax. In other words, individuals can now choose between a 12.5% tax rate without an indexation benefit and a 20% tax rate with an indexation benefit

Q- Do you think this removal of indexation will impact property investors more than property buyers?

This change will likely discourage property investment. Removing indexation benefits on real estate sales will increase taxes on long-term capital assets. The overall impact will vary based on the type of investment. For individuals investing in property for personal use or as an investment, this change will have a negative impact. However, for individuals purchasing property as part of their business operations, gains from such sales will be treated as business income, so this change will not affect them.

Q- Is investing in another house property the only way to save LTCG tax on the sale of property? If not explain the other ways and how it works?

If you reinvest your capital gains in another property within a specified time period, you can claim an exemption under the following sections -

  • Section 54: If the gains from selling a residential house are reinvested in another house property within 1 year before or 2 years after the sale date, or if the new property is constructed within 3 years from the sale date, the entire amount is exempt from tax.
  • Section 54F: If the gains from selling any long-term asset are reinvested in a residential property within 1 year before or 2 years after the sale date, or if the new property is constructed within 3 years from the sale date, the entire amount can be claimed as a tax exemption.

However, there are other ways to save tax on LTCG from sale of property too. Given below are the alternative methods -

  • Section 54EC Exemption: Invest capital gains in NHAI, REC, IRFC, or PFC bonds within 6 months of the sale for full tax exemption.
  • Section 54GB Exemption: Reinvest proceeds from the sale of residential property into eligible start-ups within the specified timeframe to claim an exemption.
  • Capital Gains Account Scheme (CGAS): If you can't invest in a new property immediately, deposit the gains in CGAS. The amount must be reinvested in a new house within 2 years to maintain the exemption. If not used within this period, the LTCG will be taxed in the year the gains were realized.

Q- Which capital asset is qualified for section 54 exemption?

The exemption under s ection 54 is allowed only if the capital gain arises from the transfer of a long-term capital asset being a residential house property or land appurtenant thereto whose income is taxable under the head 'Income from house property'.

Here, long-term capital asset means an immovable property (land or building or both), held for more than 24 months immediately preceding the date of transfer.

Q- What is the time limit for making investment in new asset under section 54?

To claim exemption under s ection 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of old house or should construct another house within a period of three years from the date of transfer

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