Section 54 of Income Tax Act: Capital Gains Exemption, Conditions, and Examples

Key Takeaways

• Section 54 allows individuals and HUFs to claim exemption from LTCG tax on the sale of a residential house property.
• Taxpayers must reinvest the capital gains in another residential house property located in India to claim the exemption.
• The transferred property must qualify as a long-term capital asset, meaning the taxpayer must hold it for more than 24 months.
• The exemption amount is the lower of the LTCG earned or the cost of the new residential property.
• Section 54 provides a maximum exemption benefit of up to ₹10 crore on eligible investments.
• Taxpayers must purchase the new house within 2 years after the sale or complete construction within 3 years.
• If taxpayers do not use the capital gains before the ITR filing due date, they must deposit the amount under the Capital Gains Account Scheme (CGAS).
• Section 54 allows investment in two residential houses once in a lifetime if the LTCG amount does not exceed ₹2 crore.

What are the Latest Updates on Section 54 of Income Tax Act?

The latest Section 54 of the Income Tax Act updates for FY 2025-26 focus on property holding period, investment location, exemption limits, and the option to invest in multiple houses. The key Section 54 of the Income Tax Act updates for FY 2025-26 include the following points:

• A residential property must be held for more than 24 months to qualify as a long-term capital asset and claim the Section 54 exemption.
• The new residential property purchased or constructed must be located in India. Properties outside India do not qualify for this exemption.
• The maximum exemption limit under Section 54 remains ₹10 crore. Any investment above this limit will not provide additional tax benefits.
• Taxpayers can invest in two residential houses if their long-term capital gains do not exceed ₹2 crore. This option can be used only once in a lifetime.

You can also refer to this detailed Section 54 PDF for the complete provisions and worked examples.

Who Can Claim Exemption Under Section 54 of the Income Tax Act?

Section 54 of the Income Tax Act allows only individuals and HUFs to claim exemption from Long Term Capital Gains arising from the transfer of a residential house property. Companies, firms, LLPs, and other entities cannot claim this exemption.

The taxpayer must satisfy the following conditions to claim exemption under Section 54:

• The taxpayer must transfer a residential house property, including a building or land appurtenant thereto, that qualifies as a residential house under the Income Tax Act.
• The property transferred must be a long-term capital asset. A residential property held for more than 24 months from the date of acquisition qualifies as a long-term capital asset.
• The taxpayer must purchase or construct another residential house property in India within the prescribed time limits to claim the exemption.
• The taxpayer cannot claim an exemption under Section 54 for purchasing or constructing a residential property outside India.

How Much Exemption is Available Under Section 54?

The amount of exemption under Section 54 is the lower of:

• The Long Term Capital Gains arising from the transfer of the original residential house property.
• The cost of the new residential house property purchased or constructed, subject to the maximum limit of ₹10 crore.

If the cost of the new house property is equal to or higher than the Long Term Capital Gains, the taxpayer can claim an exemption for the entire capital gain. If the cost of the new house property is lower than the Long Term Capital Gains, the taxpayer can claim an exemption only for the amount invested in the new house. The remaining LTCG will be taxable at the applicable capital gains tax rate under the Income Tax Act.

Time Limits for Investment Under Section 54

The time limits for purchasing or constructing the new residential property under Section 54 are as follows:

Mode of Investment	Time Limit from Date of Transfer
Purchase of new residential house before the date of transfer	Within 1 year before the date of transfer
Purchase of new residential house after the date of transfer	Within 2 years from the date of transfer
Construction of new residential house	Within 3 years from the date of transfer
Deposit in Capital Gains Account Scheme (CGAS)	Before the due date for filing the income tax return for the year of transfer

Meeting these time limits is a mandatory condition for the exemption. If the taxpayer does not purchase or construct within the prescribed period, the exemption claimed initially is withdrawn, and the LTCG becomes taxable in the year in which the period expires.

Capital Gains Account Scheme (CGAS) Under Section 54

The Capital Gains Account Scheme (CGAS) allows taxpayers to deposit unused capital gains temporarily. This applies when taxpayers have not yet purchased or constructed the new house. This deposit allows taxpayers to claim the Section 54 exemption while they complete the property investment within the prescribed time limit.

If the taxpayer has not utilized the capital gains to purchase or construct the new house before the income tax return filing due date, the taxpayer must deposit the unutilized amount in a CGAS account. The taxpayer must make this deposit with an authorized bank before the applicable filing deadline.

The amount deposited in CGAS is considered the cost of the new house while claiming exemption under Section 54 of the Income Tax Act. The taxpayer must utilize the deposited amount to purchase or construct the new residential house within the prescribed time limit.

If the taxpayer does not utilize the deposited amount within the specified period, the unutilized amount becomes taxable as a LTCG in the year when the specified period expires. The exemption calculation remains subject to the maximum limit of ₹10 crore.

For a broader view of how capital gains apply to property transactions, you can also read our guide on tax on the sale of property.

Section 54 and the Two-House Property Option

Prior to the Finance Act 2019, Section 54 allowed exemption for investment in only one (1) new residential house. The Finance Act 2019 amended Section 54 to allow investment in two residential houses, subject to one critical condition: the Long Term Capital Gains from the sale of the original property must not exceed ₹2 crore.

This two-house option is available only once in the taxpayer’s lifetime. If the gains exceed ₹2 crore, only one new house can be purchased. The taxpayer who opts for the two-house option and claims the exemption cannot exercise this option again in any subsequent assessment year.

Lock-In Period and Restrictions on the New Property

The taxpayer must not transfer the new residential house purchased or constructed under Section 54 within three years from the date of purchase or completion of construction. If the taxpayer sells the new property within this period, the earlier exemption claimed under Section 54 affects the capital gains calculation on the subsequent sale. 

While calculating capital gains on the sale of the new property, the taxpayer must reduce the cost of acquisition by the amount of the Section 54 exemption claimed earlier. This adjustment reduces the cost base of the new property and may increase the taxable capital gain. The cost does not automatically become zero unless the entire original cost is reduced by the exemption amount.

Section 54 allows taxpayers to claim an exemption even when they purchase the new residential property jointly, provided they hold ownership rights and satisfy all prescribed conditions. Courts have recognized valid joint ownership claims where the taxpayer contributes towards the investment and fulfills the exemption requirements.

For example, in CIT vs. Kamal Wahal (2013), the Delhi High Court allowed the exemption even though the taxpayer registered the new house in his wife’s name, since he had funded the entire purchase. 

Section 54 of the Income Tax Act Calculation Example

Mr. Sharma sells his residential house in Mumbai in December 2025 for ₹80 lakh. He purchased the original property for ₹30 lakh, resulting in a long-term capital gain (LTCG) of ₹50 lakh.

In January 2026, Mr. Sharma purchased a new residential flat in Pune for ₹60 lakh. Since the cost of the new flat exceeds the capital gain, he can claim an exemption under Section 54 of the Income Tax Act for the entire eligible capital gain.

Calculation:

Particulars	Amount
Long-term capital gain from original property	₹50 lakh
Cost of new residential flat	₹60 lakh
Section 54 exemption available	₹50 lakh
Taxable capital gain	Nil

Since Mr. Sharma invests more than the capital gain amount in the new residential property, he can claim a full exemption of ₹50 lakh under Section 54.

Now, assume Mr. Sharma purchases a new residential flat for ₹35 lakh instead.

Calculation:

Particulars	Amount
Long-term capital gain from original property	₹50 lakh
Cost of new residential flat	₹35 lakh
Section 54 exemption available	₹35 lakh
Remaining taxable capital gain	₹15 lakh

Mr. Sharma can claim exemption only for the amount invested in the new house. Therefore, the remaining ₹15 lakh becomes taxable as long-term capital gain.

Since Mr. Sharma transferred the property after 23 July 2024, the general tax rate applicable to long-term capital gains is 12.5% without indexation. Therefore, his tax calculation on the remaining gain will be:

Particulars	Amount
Taxable long-term capital gain	₹15 lakh
Applicable tax rate	12.5%
Tax liability before surcharge and cess	₹1.875 lakh

However, the Finance (No. 2) Act, 2024 provides a grandfathering relief for eligible taxpayers. A resident individual or HUF who acquired land or a building before 23 July 2024 can compare the tax liability under two methods:

1. 12.5% tax without indexation, or
2. 20% tax with indexation benefit. 

The taxpayer can apply the method that results in a lower tax liability. This grandfathering relief applies only to eligible resident individuals and HUFs for land or buildings acquired before 23 July 2024.  

Difference Between Section 54 and Section 54F of the Income Tax Act

Section 54 and Section 54F are both capital gains exemption provisions for investment in residential property, but they cover different scenarios. The table below shows the key differences:

Factor	Section 54	Section 54F
Asset sold	Residential house property held as a long-term capital asset	Any long-term capital asset other than a residential house property, such as land, gold, equity shares, or commercial property
Who can claim	Individuals and HUFs only	Individuals and HUFs only
Exemption amount	Lower of Long Term Capital Gains or cost of the new house, subject to the applicable limit	Proportionate exemption based on the amount invested in the new house compared with the net sale consideration
New property limit	One residential house. Two houses are allowed once in a lifetime if Long Term Capital Gains do not exceed ₹2 crore	One residential house property only
Condition of existing houses	No restriction on the number of existing residential houses	Taxpayer must not own more than one residential house on the date of transfer, other than the new asset
Time limits	Purchase: 1 year before or 2 years after transfer. Construction: 3 years after transfer	Same time limits apply

Section 54 and Related Capital Gains Exemptions (Section 54B, 54D, 54EC, and 54F)

Section 54 is one of the capital gains exemption provisions under the Income Tax Act. Other related provisions, such as Section 54B, Section 54D, and Section 54EC, provide exemptions for different assets and reinvestment options:

Section 54B – Exemption on Sale of Agricultural Land

Section 54B allows an individual or a Hindu Undivided Family (HUF) to claim an exemption on capital gains arising from the transfer of agricultural land. The taxpayer must have used the agricultural land for agricultural purposes during the 2 years immediately preceding the date of transfer. In the case of an individual, the land may also have been used by the individual’s parent for agricultural purposes.

To claim the exemption, the taxpayer must purchase another agricultural land within 2 years of the date of transfer. The taxpayer can claim an exemption to the extent of the amount invested in the new agricultural land, subject to the conditions prescribed under Section 54B.

Section 54D – Exemption on Compulsory Acquisition of Industrial Land or Building

Section 54D allows an exemption when the government compulsorily acquires land or a building of an industrial undertaking. The taxpayer must reinvest the capital gains in land or a building for industrial use. The taxpayer must complete this reinvestment within 3 years from the date of acquisition to keep the exemption.

Section 54EC – Exemption Through Investment in Specified Bonds

Section 54EC allows an exemption on capital gains from the transfer of land, a building, or both held as long-term capital assets. The taxpayer must invest the gains in specified bonds, such as those issued by the National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC). The taxpayer must invest within 6 months from the date of transfer, subject to a maximum of ₹50 lakh in a financial year. These bonds carry a lock-in period of 5 years, and early redemption reverses the exemption.

The table below summarizes these related exemptions for quick reference.

Section	Asset Transferred	Required Investment	Time Limit
Section 54	Long-term residential house property	Purchase or construction of another residential house property in India	Purchase within 1 year before or 2 years after transfer; construction within 3 years after transfer
Section 54B	Agricultural land used for agricultural purposes	Purchase of new agricultural land	Within 2 years from the date of transfer
Section 54D	Land or building forming part of an industrial undertaking acquired compulsorily	Purchase or construction of land or building for industrial purposes	Within 3 years from the date of receipt of compensation
Section 54EC	Long-term capital asset consisting of land, building, or both	Investment in specified bonds issued by notified institutions	Within 6 months from the date of transfer, subject to the applicable limit
Section 54F	Any long-term capital asset other than a residential house property	Purchase or construction of a residential house property in India	Purchase within 1 year before or 2 years after transfer; construction within 3 years after transfer

Need help with claiming the Section 54 exemption without errors? RegisterKaro can assist you with accurate guidance from CA experts who understand capital gains rules, exemption conditions, investment timelines, and documentation requirements. Our CA professionals can help you evaluate your eligibility, calculate the exemption amount, and complete the required tax procedures correctly.

Contact us today for assistance with the Section 54 capital gains exemption and ensure your property transaction follows the applicable Income Tax requirements!

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