Section 54 of Income Tax Act - Capital Gains Exemption on Sale of Residential House

By CA Mohammed S Chokhawala

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Updated on: Jul 16th, 2025

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6 min read

Section 54 of the Income Tax Act provides exemptions from long-term capital gains tax if the gains from the sale of a residential house are reinvested in purchasing another residential property within 2 years or constructing another residential property within 3 years from the date of sale. This helps taxpayers save tax by reinvesting the sale proceeds in a new home, subject to conditions under the Act.

Section 54 of Income Tax Act - Capital Gains Exemption on Sale of Residential House

What is Section 54?

Section 54 of the Income Tax Act provides an exemption from long-term capital gains tax when an individual or Hindu Undivided Family (HUF) sells a residential house property and reinvests the capital gains in purchasing or constructing another residential house within the specified time period. This helps taxpayers save tax by reinvesting their gains in a new home, subject to meeting all conditions under the section.

What are the benefits of an asset being classified as a long-term capital asset?

The main benefits of an asset being classified as a long-term capital asset include:

  • Eligibility for indexation benefits, which adjusts the purchase price for inflation, reducing taxable gains.
  • Access to specific exemptions under the Income Tax Act, such as Sections 54, 54EC, and 54F, which are available only for long-term assets.
  • From 23rd July 2023, for land and building, taxpayers have the option to pay tax at 12.5% without indexation or 20% with indexation, whichever is beneficial.

Exemption under Section 54

Under Section 54 of the Income Tax Act, individuals and HUFs can claim exemption on long-term capital gains from selling a residential house if they reinvest in another residential property. Firms, LLPs, companies, or other entities cannot claim this exemption.

Key Conditions:

  • The asset sold must be a long-term capital asset (held for more than 24 months).
  • The asset should be a residential house property, with income taxable under “Income from House Property”.
  • The seller must purchase another residential house within 1 year before or 2 years after the sale, or construct a new house within 3 years from the date of sale or from the date of compensation in case of compulsory acquisition.
  • The new residential property must be located in India. Buying a property abroad does not qualify for exemption.
  • From 1st April 2023, the exemption is capped at Rs. 10 crore. Earlier, there was no limit.

All these conditions are cumulative. Failure to meet even one will disqualify the seller from availing the exemption under Section 54.

What is the amount of Exemption available under Section 54 of the Income Tax Act?

The amount of exemption under Section 54 of the Income Tax Act for the long-term capital gains will be the lower of:

  • Long-Term Capital gains arising on transfer of residential house, Or
  • The investment made in purchase or construction of a new residential house property. Hence, the balance capital gains (If any) will be taxable.

To illustrate:

Mr X sells his villa(house property) for Rs 45,00,000. With the proceeds of the sale, he purchases another villa for Rs 20,00,000. Capital Gains will be computed as follows

ParticularsAmt (Rs)
Capital gain on transfer of residential house45,00,000
Less: Investment made in residential house property20,00,000
Taxable Capital Gains25,00,000

The exemption will be lower of the Capital Gains (Rs 45,00,000) or investment in new property (Rs 20,00,000), so the exemption will be Rs 20,00,000.

Limit for Capital Gains Exemption on Sale of Residential House

Budget 2023: Long-term capital gain exemption will be capped at ₹10 crores on sale of: 

Amended sectionsSale ofSale amount invested inExemption Amount
Section 54Residential propertyNew residential property10 crores
Section 54FAny long-term asset other than residential propertyNew residential property10 crores

What is Section 54?

Section 54 of the Income Tax Act provides an exemption from long-term capital gains tax when an individual or Hindu Undivided Family (HUF) sells a residential house property and reinvests the capital gains in purchasing or constructing another residential house within the specified time period. This helps taxpayers save tax by reinvesting their gains in a new home, subject to meeting all conditions under the section.

What are the provisions relating to the transfer of property after claiming benefit under Section 54?

If the new house is sold within 3 years from the date of purchase or construction,  then the exemption claimed earlier under section 54 shall be indirectly taxable in the year of sale of the new house property. Let’s consider two scenarios when the new house is sold within 3 years from the date of purchase or construction:

Case 1: Cost of the new house purchased is less than the capital gains computed on the sale of the original house.

Generally, when a house is sold, the profit is considered as capital gains. However, when the new house is sold within 3 years from the date of purchase or construction, then the cost of acquisition will be considered as Nil. Hence, there will be an indirect increase in taxable capital gains

Example-

Mr Y has sold residential house property in May 2015 and the capital gains amounted to Rs. 30,00,000/- In June 2015, Mr Y purchased a residential house property worth Rs. 18,00,000/- 

Mr Y sells the new residential house property (Purchased in June 2015) in December 2016 for Rs. 35,00,000/- 

Based on the facts mentioned above, lets compute the taxable capital gains for Mr Y . FY 15-16 (Property sold in May 2015)

ParticularsAmount (Rs.)
Capital gain on transfer of residential house30,00,000
Less: Investment made in residential house property18,00,000
Balance – Taxable Capital Gains In FY 15-1612,00,000

FY 16-17 (Property sold in December 2016)

ParticularsAmount (Rs.)
Consideration for transfer (Sale Consideration)35,00,000
Less: Cost of AcquisitionNIL
Balance – Taxable Capital Gains In FY 16-1735,00,000

Note: 

As the new property for which deduction was claimed under Section 54 was sold in December 2016 (ie within 3 years from the date of acquisition), hence it’s cost of acquisition was considered as NIL. 

As a result, the entire sale consideration was considered as capital gains. Had the property been sold after 3 years , ie after June 2018, then in such case the cost of acquisition would be available as a deduction and capital gains would reduce.  

Case 2: Cost of the new house purchased is more than the capital gains computed on the sale of the original house 

If the cost of the new asset purchased is greater than the capital gains, then it is obvious that there will be no capital gains as the entire capital gains will be exempted. However, if the new house is sold within 3 years, then cost of the new house will be computed as follows:  

ParticularsAmount (Rs.)
Original CostXXX
Less : Capital gains claimed for the earlier house propertyXXX
Cost of the new houseXXX

Example

Let’s understand the above case with the help of an example Mr Z has sold a residential house property and the capital gains is Rs 25,00,000/- in June 2015. 

In October 2015, Mr Z purchased a new residential house property of Rs 40,00,000/- In January 2017, Mr Z sold the new residential house Property for Rs 55,00,000/- 

Based on the capital gains mentioned above, let’s compute the taxable capital gains for Mr Z FY 15-16 (Property sold in June 2015)

ParticularsAmount (Rs)
Capital gain on transfer of residential house25,00,000
Less: Investment made in residential house property40,00,000
Balance – Taxable Capital Gains In FY 15-16NIL

FY 16-17 (Property sold in January 2017)

ParticularsAmount (Rs.)
Consideration for transfer (Sale Consideration)55,00,000
Less: Cost of Acquisition (Refer Working Note Below)15,00,000
Balance – Taxable Capital Gains In FY 16-1740,00,000

Working Note 1: Computation of cost of acquisition (As the property was sold within 3 years of purchase and Section 54 was claimed)

ParticularsAmount (Rs)
Cost of Acquisition40,00,000
Less: Capital gains claimed for earlier house property25,00,000
Cost of the new house (to be considered)15,00,000

What is Capital Gains Account scheme?

The Capital Gains Account Scheme (CGAS) allows taxpayers to claim exemption on capital gains if they have not yet purchased or constructed a new house within the specified time frame. If the asset is sold in a financial year and the new property is yet to be purchased (within 2 years) or constructed (within 3 years), the capital gains must be deposited in a CGAS account with a public sector bank before the due date of filing the income tax return.

The amount already spent on purchase or construction, along with the amount deposited in the CGAS, is eligible for exemption. However, if the deposited amount is not utilised within the specified time, it will be treated as taxable income in the year when the 3-year period expires from the date of sale of the original asset.

Section 54 v/s Section 54F - Difference

Earning income automatically casts a responsibility on the taxpayers to discharge income tax on such income and so is the case with capital gains too. However, the income tax laws allow taxpayers to claim certain exemptions against capital gains, which will help reduce their tax outgo.

Two such very crucial exemptions one can claim are under Sections 54 and 54F. As discussed above the exemption under Section 54 is available on long-term Capital Gain on sale of a House Property. Exemption under Section 54F is available on long-term Capital Gain on sale of any asset other than a House Property.

Common requirements between the two Sections

To claim exemptions under Section 54 or Section 54F, the following common conditions must be met:

  • A new residential house property must be purchased or constructed.
  • The new property must be purchased within 1 year before or 2 years after the sale of the original asset.
  • Alternatively, it must be constructed within 3 years from the date of sale.
  • If the capital gains are not reinvested before the tax filing due date or within 1 year from the sale (whichever is earlier), the amount should be deposited in a Capital Gains Account Scheme (CGAS) with a public sector bank.
Section 54Section 54F
To claim full exemption the entire capital gains have to be invested.To claim full exemption the entire sale receipts have to be invested.
In case entire capital gains are not invested – the amount not invested is charged to tax as long-term capital gains.

In case entire sale receipts are not invested, the exemption is allowed proportionately.

[Exemption = Cost the new house x Capital Gains/Sale Receipts]

 You should not own more than one residential house at the time of sale of the original asset.
This exemption will be reversed if you sell this new property within 3 years of purchase and capital gains from the sale of the new property will be taxed as short-term capital gains.This exemption will be reversed if you sell this new property within 3 years of its purchase or construction OR if you purchase another residential house within 2 years of the sale of the original asset or construct a residential house other than the new house within 3 years of the sale of the original asset. Capital gains from the sale will be taxed as long-term capital gains.
If the capital gains does not exceed Rs.2 crores, a once in a lifetime exemption is available for investment in 2 properties.No such exemption available

Key points to remember

  • Proportionate exemption: If the cost of the new residential property is less than the total capital gains, exemption is allowed only for the invested amount. The remaining gains can be reinvested under Section 54EC within 6 months to claim further exemption.
  • The new property must be purchased in the name of the seller to avail the exemption.
  • If the builder fails to hand over the property within 3 years, the exemption is still valid, provided the investment was made as per the conditions.

Frequently Asked Questions

Mr A purchased the Residential Property on 20.02.2022 & Sold it on 30.03.2023. He invested the Gains in Other Residential Property on 30.06.2023. Can he claim an Exemption under section 54?

No. Since it is a short-term capital gain, no exemption can be claimed.

Mr B purchased the Residential Property on 20.02.2015 and sold it on 30.03.2024. He Purchased another Residential Property on 30.12.2026. Can he claim an Exemption under section 54?

No. Since it is not purchased within 2 Years from the date of sale.

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 they want to sell the new property owned by them, the individual must hold the property for a minimum of three years as per section 54.

If they sell before the stipulated time, the benefit given to them will be withdrawn, and they will have to pay the tax on capital gains.

About the Author
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CA Mohammed S Chokhawala

Content Writer
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I'm a chartered accountant, well-versed in the ins and outs of income tax, GST, and keeping the books balanced. Numbers are my thing, I can sift through financial statements and tax codes with the best of them. But there's another side to me – a side that thrives on words, not figures. Read more

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