Sections 54 + 54F — Capital Gains Exemption on Property Reinvestment (FY 2025-26)

📅 IT Act 2025 transition — effective 1 April 2026. The Income-tax Act, 1961 stands repealed per Section 536 of the Income-tax Act, 2025. Under the 2025 Act, the capital gains chapter is consolidated — Sections 45-55A of the 1961 Act are renumbered into the 2025 Act framework. The substantive policy (LTCG / STCG bifurcation, indexation, Section 54/54F reinvestment exemptions, ₹10 crore cap on Section 54/54F effective AY 2024-25 onwards) is retained. For FY 2025-26 disposals (filed by July-Oct 2026 under AY 2026-27), the 1961 Act + existing section numbers continue to apply. See the canonical IT Act 2025 transition memo for the full section-by-section mapping.

Why these sections exist

Capital gains tax discourages liquidating long-held assets. Sections 54 + 54F are rollover exemptions designed to encourage taxpayers to channel sale proceeds into residential housing — Section 54 for those moving from one home to another, Section 54F for those rotating non-residential capital (shares, gold, commercial property) into a residential house.

Both sections work the same way operationally: reduce the LTCG by the qualifying investment, then apply the LTCG rate to the residual. The differences are in (a) what asset is sold, (b) what amount must be invested, and (c) one-time / recurring use.

For the broader LTCG / STCG rate framework that the residual taxable gain is computed at, see the Capital Gains Post-July 2024 spoke and the Old vs New Tax Regime comparison.

Section 54 — sale of residential property

Eligibility

• Eligible assessee: Individual or HUF only. Companies, firms, LLPs are outside scope.
• Asset transferred: a residential house property (income chargeable under “Income from House Property”). Land appurtenant to the house is included.
• Holding period: must be a long-term capital asset. For immovable property, “long-term” = > 24 months (Section 2(42A)).

Investment requirement

Invest the capital gain amount (not the full sale consideration) in a new residential house situated in India. Investing abroad does not qualify.

Time windows

• Purchase: within 1 year before or 2 years after the date of transfer of the original house
• Construction: within 3 years after the date of transfer

If under-construction property is purchased from a builder, the 3-year construction window applies (not the 2-year purchase window) — the timeline is anchored to when possession + completion certificate is received.

Two-property carve-out

Default rule: invest in one residential house only. Exception (FY 2019-20 onwards): if LTCG ≤ ₹2 crore, the taxpayer may invest in two residential houses. This option is a one-time-in-lifetime election. If gain exceeds ₹2 crore, exemption is restricted to a single property.

₹10 crore cap (Finance Act 2023)

For transfers on or after 1 April 2023, the maximum deduction under Section 54 is ₹10 crore. Even if a taxpayer reinvests ₹15 crore of LTCG in a new house, exemption is capped at ₹10 crore; the remaining ₹5 crore is taxable LTCG.

Worked example

Sale of residential house (held 5+ years):

Item	Amount
Sale consideration	₹80,00,000
Indexed cost of acquisition	₹30,00,000
LTCG	₹50,00,000
Cost of new house purchased within 2 years	₹55,00,000
Section 54 exemption (capped at LTCG)	₹50,00,000
Taxable LTCG	₹0

Reinvestment exceeds the gain → entire LTCG exempt.

Section 54F — sale of any other long-term capital asset

Eligibility

• Eligible assessee: Individual or HUF only
• Asset transferred: any LTCA other than a residential house property (commercial property, agricultural land, gold, unlisted shares, listed securities, etc.)

Investment requirement

Invest the net sale consideration in a new residential house in India. Net consideration = gross sale value − expenses wholly + exclusively connected to the transfer (brokerage, legal fees on sale, stamp duty paid by seller).

This is the big distinction from Section 54 — under 54 you invest only the GAIN; under 54F you must invest the FULL NET CONSIDERATION (which is much larger).

Time windows + ₹10 crore cap

Identical to Section 54: 1 year before / 2 years after for purchase; 3 years for construction; new property in India; ₹10 crore cap on the qualifying net consideration.

Existing-property restriction

On the date of transfer of the original asset, the taxpayer must not own more than one other residential house (apart from the new one being claimed for exemption). This restriction prevents using Section 54F to accumulate a residential portfolio.

Anti-stacking restriction

Within 2 years after the original transfer, the taxpayer cannot purchase any other residential house (other than the new one). Within 3 years, cannot construct any other residential house. Breaching this revokes the exemption (taxable as LTCG in the year of breach).

Proportional exemption

If the taxpayer invests only part of the net consideration, the exemption is proportional:

Exemption = LTCG × (Amount Invested in New House ÷ Net Consideration)

Worked example

Sale of commercial plot held 5+ years:

Item	Amount
Gross sale value	₹3,10,00,000
Brokerage paid by seller	₹10,00,000
Net consideration	₹3,00,00,000
Cost of acquisition	₹1,00,00,000
LTCG	₹2,00,00,000
Amount invested in new residential house	₹1,50,00,000
Section 54F exemption = ₹2cr × (1.5cr / 3cr)	₹1,00,00,000
Taxable LTCG	₹1,00,00,000

Partial reinvestment → proportional exemption.

Capital Gains Account Scheme (CGAS)

Why it exists

The 2-year purchase / 3-year construction window often extends past the ITR filing due date for the year of sale. To preserve the exemption while the taxpayer searches for or builds the new property, the law mandates depositing the unutilised amount in a designated CGAS account.

Deposit before ITR due date

Any unutilised gain (under Section 54) or unutilised net consideration (under Section 54F) must be deposited in a CGAS account with an authorised public sector bank before the ITR due date under Section 139(1) (typically 31 July for non-audit cases, 31 October for audit cases). The deposit certificate (Form A) is attached to the ITR.

Account types

CGAS offers two account types:

• Type A (savings) — immediate-withdrawal account; interest at savings rate
• Type B (term deposit) — fixed-term account; interest at term-deposit rate, higher than Type A

Withdrawal rules

Funds can be withdrawn only for the specific purpose of buying / constructing the new house. Withdrawals require Form C; banks may release funds against contractor invoices, registration documents, etc.

Failure-to-use consequences

If the deposit is not fully utilised within the statutory window (3 years from the original sale date), the unutilised amount is treated as LTCG of the FY in which the 3-year period expires. Taxed at the LTCG rate in force in that year.

Post-July 2024 LTCG rate interaction

The Finance (No. 2) Act 2024 restructured LTCG rates for transfers on or after 23 July 2024:

• Default: 12.5% without indexation
• Real estate (immovable property) acquired before 23 July 2024: taxpayer (resident individuals / HUFs only) can elect 20% with indexation if it yields lower tax — grandfathering relief

How the election interacts with Section 54 / 54F

Mechanically:

1. Compute LTCG under each method (12.5% no-indexation vs 20% with-indexation, where applicable)
2. Apply Section 54 / 54F exemption to the LTCG (reducing it)
3. Apply the chosen rate to the residual taxable LTCG

The exemption reduces the gain before the rate is applied — so the rate choice mainly matters for the post-exemption residual.

Revocation triggers

Selling the new property within 3 years

Under both Section 54 + 54F: if the new house is transferred within 3 years from purchase / completion of construction:

• The cost of acquisition of the new house for STCG computation is reduced by the originally-exempted gain
• The reduced cost results in much higher STCG, effectively capturing the previously-untaxed gain
• Taxed as STCG (since the new house has been held < 3 years) at slab rates

Section 54F additional triggers

If within 2 years of the original transfer, taxpayer buys another residential house (other than the new one) → exemption revoked, taxed as LTCG in year of breach. If within 3 years, taxpayer constructs another residential house → same revocation.

Tax recovery mechanic

For Section 54 / 54F revocation, the previously-exempted gain is added to income of the FY in which the breach occurs (not retrospectively to the year of original sale).

54 vs 54F vs 54EC

Section 54EC provides an alternative for sale of land or building: invest LTCG up to ₹50 lakh per FY in specified infrastructure bonds (NHAI / REC / PFC / IRFC) within 6 months of the transfer. The bonds carry a 5-year lock-in period.

Feature	Section 54	Section 54F	Section 54EC
Asset sold	Residential house	Any other LTCA	Land or building (any)
Reinvest in	Residential house	Residential house	Specified bonds
Amount to invest	LTCG only	Full net consideration	LTCG up to ₹50L / FY
Window	1 yr before / 2 yr after / 3 yr construction	Same	6 months after
Cap	₹10 cr	₹10 cr	₹50 L per FY
Lock-in	3 yr on new house	3 yr + anti-stacking	5 yr on bonds

Taxpayers often stack Section 54 + 54EC: invest the bulk of LTCG in a new house under Section 54, the residual (up to ₹50L) in bonds under 54EC.

Common pitfalls

1. Confusing gain (54) vs net consideration (54F) requirement — the most frequent error. Selling shares for ₹2 crore with ₹50L LTCG, then investing only ₹50L in a new house under Section 54F → proportional exemption of just ₹12.5L (₹50L × 50L / 2cr), not full ₹50L. Section 54F requires the entire ₹2 crore net consideration to be invested for full exemption.
2. Missing the CGAS deadline — keeping sale proceeds in a regular savings account past the ITR due date. If not in CGAS by the deadline, exemption is disallowed even if you buy a house two months later.
3. Buying foreign property — the new house must be in India. Dubai / London property does not qualify.
4. Selling new property within 3 years — converts the exempted gain into STCG in the year of breach, taxed at slab rates.
5. Forgetting the ₹10 crore cap — high-net-worth individuals attempting to shield ₹15-20 crore gains by buying luxury property. Exemption is hard-capped at ₹10 crore from FY 2023-24 onwards.
6. Treating bare land purchase as Section 54F-qualifying — investing in a vacant residential plot without constructing a house within 3 years → revocation. The exemption is for a residential house, not residential land.
7. Stacking Section 54 + 54F on the same gain — not permitted. The sections apply to different original-asset types and cannot both apply to the same transaction.
8. Joint-ownership confusion — for jointly-owned property sold, each co-owner’s share of LTCG is exempted separately based on their reinvestment.

How to claim in the ITR

The exemption is claimed in Schedule CG (Capital Gains) of ITR-2 or ITR-3.

Inputs required:

• Sale consideration + cost of acquisition + indexed cost (where applicable) → computes LTCG
• Section 54 / 54F election + amount invested + date of investment
• CGAS deposit details (account number, bank, amount, date) where applicable
• Section 54EC bond details if stacking

The ITR utility subtracts the exemption from gross LTCG to compute taxable LTCG, then applies the chosen rate (12.5% or 20% with grandfathering election). For the broader ITR-form selection logic, see the ITR Form Selector Guide. For end-to-end LTCG planning + ITR filing through a partner CA firm, see the ITR Filing service.