Section 54 of the Income Tax Act, 1961, is a provision that offers an exemption from long-term capital gains tax on the sale of a residential property, provided the gains are reinvested in purchasing or constructing another residential property in India. Enacted to promote investment in residential real estate, this section is particularly relevant for individuals and Hindu Undivided Families (HUFs) looking to optimize their tax liabilities. This article details its provisions, eligibility criteria and practical implications.
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What is Section 54 of Income Tax Act, 1961
Section 54 aims to encourage reinvestment in residential properties by offering tax relief on capital gains. It’s designed for individuals and HUFs selling a residential house, with clear rules on reinvestment timelines and conditions.
Who Can Claim: Only individuals or Hindu Undivided Families (HUFs) are eligible, not companies or firms.
Property Type: Must be a long-term capital asset (held >24 months), specifically a residential house with income under "Income from House Property."
Reinvestment Rules: Buy a new property within 1 year before or 2 years after the sale, or construct within 3 years after. The new property must be in India.
The exemption is the lower of capital gains or cost of the new property, capped at ₹10 crore from Assessment Year 2024-25.
A special rule from AY 2020-21 allows buying two houses if gains are ≤ ₹2 crore, but only once in a lifetime.
Recent Changes and Updates
Several recent changes have impacted Section 54, reflecting updates in the tax regime as of 2025:
Budget 2025: The rebate under Section 87A was increased to ₹60,000, making income up to ₹12 lakhs tax-free under the new tax regime. However, this does not apply to capital gains.
Finance Act 2023: Introduced a cap of ₹10 crore on the exemption under Sections 54 and 54F from Assessment Year 2024-25, effective April 1, 2024.
Budget 2024: Removed the indexation benefit for properties sold after July 23, 2024. Taxpayers can now choose to pay tax at 12.5% without indexation or 20% with indexation for properties purchased before this date, impacting the calculation of long-term capital gains.
Also, Learn about Deductions under Section 80C of Income Tax Act, 1961.
Purpose and Scope of Section 54 of Income Tax Act
The primary purpose of Section 54 is to encourage reinvestment of capital gains from the sale of a residential house into another residential property, thereby stimulating the real estate sector and providing tax relief to taxpayers. It applies specifically to long-term capital assets, defined as properties held for more than 24 months, with income chargeable under the heading "Income from House Property." This provision is part of Chapter IV-E of the Act, which deals with capital gains, and is designed to balance tax collection with economic incentives.
Eligibility Criteria
To claim exemption under Section 54, the following conditions must be met:
Taxpayer Category: Only individuals and HUFs are eligible. This excludes companies, partnership firms, Limited Liability Partnerships (LLPs), and other associations.
Nature of Asset: The property sold must be a long-term capital asset, meaning it has been held for more than 24 months. From July 23, 2024, taxpayers have the option to pay tax at 12.5% without indexation or 20% with indexation for land and buildings.
Property Type: The property must be a residential house, with its income classified under "Income from House Property" for tax purposes.
Conditions for Exemption
The reinvestment must adhere to specific timelines and conditions:
Purchase Timeline: The new residential property must be purchased within 1 year before the date of sale of the original property or within 2 years after the sale. For properties acquired through compulsory acquisition, the timeline starts from the date of receiving compensation.
Construction Timeline: If the taxpayer opts to construct a new property, it must be completed within 3 years from the date of sale of the original property.
Location: The new property must be located in India; purchasing property abroad does not qualify for exemption.
Exemption Limit: From Assessment Year 2024-25 (effective April 1, 2024), the exemption is capped at ₹10 crore, a change introduced by the Finance Act 2023.
Special Exemption: From Assessment Year 2020-21, taxpayers can claim exemption for purchasing two residential houses if the capital gain does not exceed ₹2 crore, but this can be availed only once in a lifetime.
Calculation of Exemption
The exemption under Section 54 is calculated based on the following principles:
The exemption amount is the lower of:
The total long-term capital gains arising from the sale of the original property.
The cost of the new residential property purchased or constructed.
If the entire capital gain is not reinvested, the uninvested portion is taxable as long-term capital gains at the applicable rate (20% with indexation or 12.5% without, depending on the date of purchase and sale).
Example: If a property is sold for ₹45,00,000 with capital gains of ₹25,00,000, and ₹20,00,000 is invested in a new property, the exemption is ₹20,00,000, and the remaining ₹5,00,000 is taxable.
For partial investment, the exemption is proportional under Section 54F (for non-residential assets), but under Section 54, the leftover amount is directly taxable.
Read Section 147 of Income Tax Act, 1961.
Capital Gains Account Scheme (CGAS)
If the capital gains are not fully utilized for purchasing or constructing a new property by the due date of filing the Income Tax Return (ITR), the unutilized amount can be deposited in the Capital Gains Account Scheme (CGAS) with a public sector bank. This scheme allows taxpayers to defer tax liability:
Deposit Deadline: The deposit must be made before the due date for filing ITR under Section 139(1), typically July 31 for individuals (without audit) or later for audited cases.
Utilization Period: The amount must be utilized within 2 years for purchase or 3 years for construction. If unutilized after these periods, it is treated as capital gains in the year of expiry.
Documents Required
To claim exemption under Section 54, taxpayers typically need the following documents:
Sale deed of the original property.
Purchase deed of the new property.
Completion certificate, if the new property is under construction.
Bank statements showing the transaction of funds.
Form 10BA, which is required to be filed along with the ITR to claim the exemption.
Withdrawal of Exemption
The exemption can be withdrawn in the following scenarios:
If the amount deposited in CGAS is not utilized within the specified timelines (2 years for purchase, 3 years for construction), it becomes taxable in the year it is withdrawn.
If the new residential property is sold within 3 years of its purchase or construction, the exemption is reversed, and the gains are taxed as long-term capital gains.
Learn about the Principles of Corporate Governance.
Comparison with Section 54F
Section 54F is a related provision that offers exemption for long-term capital gains from the sale of assets other than residential properties, such as shares, stocks, or gold, if reinvested in a residential property. Below is a detailed comparison to highlight the differences:
Aspect | Section 54 | Section 54F |
Applies to | Sale of residential property | Sale of any long-term asset (not residential) |
Investment for Exemption | Entire capital gains must be invested | Entire net sale proceeds must be invested |
Partial Investment | Leftover taxed as LTCG | Exemption proportional; formula: Cost of new house x Capital Gains/Net Sale Proceeds |
Ownership Rule | No restriction on owning multiple properties | Cannot own >1 residential property at sale time |
Sale Within 3 Years | Exemption reversed, taxed as LTCG | Exemption reversed if new property sold within 3 years, or another property purchased/constructed within specified periods |
Summary
Section 54 of the Income Tax Act, 1961, grants tax exemptions on long-term capital gains from selling a residential property for individuals and HUFs, provided gains are reinvested in another residential property in India. The new property must be purchased within one year before or two years after the sale, or constructed within three years. The exemption, capped at ₹10 crore (from AY 2024-25), is the lower of the gains or the new property’s cost. A one-time option allows buying two houses if gains are ≤ ₹2 crore. Unutilized gains can be deposited in the Capital Gains Account Scheme to defer tax.
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Section 54 of Income Tax Act: FAQs
Q1. What are the exemptions under Section 54 of Income Tax?
Exemption on long-term capital gains from selling a residential property if reinvested in another residential property in India within 1 year before/2 years after sale or constructed within 3 years, capped at ₹10 crore (from AY 2024-25).
Q2. What is the difference between Section 54, 54F, and 54EC?
Section 54: Exempts long-term capital gains from residential property if reinvested in another. Section 54F: Exempts non-residential asset gains if proceeds reinvested in one residential property; stricter rules. Section 54EC: Exempts any long-term asset gains if invested in specified bonds within 6 months, capped at ₹50 lakh.
Q3. How many times can a Section 54 exemption be claimed?
No limit on the number of times, but the two-house exemption (gains ≤ ₹2 crore) is allowed only once in a lifetime.
Q4. What is the exemption of Section 54 and 54F?
Section 54: Lower of capital gains or cost of new residential property, capped at ₹10 crore. Section 54F: Proportional exemption based on net sale proceeds reinvested in one residential property, also capped at ₹10 crore.
Q5. Can I claim Section 54 and 54EC simultaneously?
Yes, if conditions for both are met, as they apply to different reinvestment options (residential property for 54, specified bonds for 54EC).
