Section 54 of the Income Tax Act, 1961 – Capital Gains Exemption on Sale of Residential Property

Section 54 of the Income Tax Act, 1961 provides relief to taxpayers on long-term capital gains (LTCG) arising from the sale of a residential property. If these gains are reinvested in the purchase or construction of another residential house within a specified period, the taxpayer can claim exemption from capital gains tax.

This provision is especially beneficial for individuals and Hindu Undivided Families (HUFs) looking to reinvest proceeds from property sales into another home. Let’s understand its scope, eligibility, latest changes, and calculation methods.

 Earlier, taxpayers with LTCG had to file ITR-2 or ITR-3. Now, individuals with LTCG up to ₹1.25 lakh from listed equity shares or mutual funds under Section 112A can use the simpler ITR-1 (Sahaj) or ITR-4 (Sugam), provided there are no carried-forward losses.

Taxpayers must now separately disclose gains from transactions before and after 23 July 2024, aligning with revised capital gains tax rules that reduced real estate LTCG tax to 12.5% (without indexation) from the earlier 20% (with indexation).

From 1 October 2024, buyback proceeds from listed companies will be treated as dividends and must be reported under Income from Other Sources. In the capital gains schedule, sale proceeds will reflect as zero, and cost of acquisition can be claimed as a capital loss.

Trusts and NGOs filing ITR-7 must disclose capital gains separately for pre- and post-23 July 2024 transactions.

 In ITR-2, the disclosure limit for assets/liabilities has been raised to ₹1 crore, easing compliance for smaller taxpayers.

For taxation purposes, capital assets are divided into:

• Short-Term Capital Assets (STCA): Held for ≤ 24 months (land, building, property).
  
• Long-Term Capital Assets (LTCA): Held for > 24 months.
  

Special rules:

• Listed securities, equity mutual funds, and zero-coupon bonds become LTCA if held for > 12 months.
• From 23 July 2023, real estate LTCG tax is 12.5% without indexation or 20% with indexation, whichever is more beneficial.

1. Indexation benefits: Adjusts cost of acquisition for inflation.
   
2. Eligibility for exemptions: Sections 54, 54EC, and 54F apply only to LTCG.
3. Tax rate choice for real estate: 12.5% without indexation vs 20% with indexation.

• Only Individuals and HUFs can claim it.
  
• Property sold must be a residential house held for > 24 months.
  
• New residential house must be purchased 1 year before or 2 years after the sale, or constructed within 3 years.
  
• New property must be located in India.
• Maximum exemption: ₹10 crore (from 1 April 2023).

Earlier, investors could reinvest unlimited capital gains. Now, only up to ₹10 crore is exempt. Gains above this are taxable.

To claim exemption:

• Purchase of new property: within 1 year before or 2 years after transfer of old house.
  
• Construction of new property: within 3 years of transfer.
  

If unable to reinvest before filing ITR, the unutilized capital gains must be deposited in a Capital Gains Account Scheme (CGAS) before the due date of filing returns.

The exemption = Lower of:

• LTCG on sale of old property, or
  
• Investment in new property
  

Mr. Anand sells a house and earns LTCG of ₹35,00,000. He buys another house for ₹20,00,000.

• Exemption: ₹20,00,000
• Taxable LTCG: ₹15,00,000 (₹35,00,000 – ₹20,00,000)

• If sold within 3 years, the exemption is withdrawn.
  
• Cost of acquisition becomes nil or reduced, and entire gain becomes taxable.

If unable to invest before ITR due date:

• Deposit unutilized capital gains in CGAS at authorized banks.
  
• Must reinvest within 2 years (purchase) or 3 years (construction).
  
• If unused, it becomes taxable in the year the period expires

• Sale deed of old property
  
• Purchase/construction deed of new property
  
• Capital gains computation sheet
  
• Bank statements for payments
• Form 10BA (declaration for exemption claim)

• Section 54EC: Invest in specified bonds (NHAI, REC, PFC, IRFC) within 6 months.
  
• Section 54GB: Invest in eligible start-ups.
• CGAS deposits: Temporary option if not reinvesting immediately.

Section 54 offers a powerful way to save taxes on capital gains if you’re selling a residential property. By carefully planning the reinvestment—whether in another property, bonds, or using CGAS—you can maximize exemptions and minimize tax liability.

Since ITR filing for FY 2024–25 has already begun and the last date is 15 September 2025, make sure you comply with timelines to avoid notices or penalties.

If you’ve recently sold property, consulting a tax expert can help you identify the best strategy to reinvest and claim exemptions efficiently.