Section 54 and 54F — Capital Gains Exemption on Investment in New House

When you sell a capital asset and earn long-term capital gains (LTCG), you can save tax by investing the gains (or sale proceeds) in a new residential house property. Sections 54 and 54F of the Income Tax Act provide this exemption — Section 54 for LTCG from sale of a house, and Section 54F for LTCG from sale of any other long-term capital asset.

Section 54 — LTCG from Residential House Property

• Applies when: You sell a long-held residential house property (held for more than 2 years) and earn LTCG
• Exemption: Invest LTCG amount in purchasing or constructing another residential house
• Time limit: Purchase: 1 year before or 2 years after the date of sale. Construction: within 3 years of sale
• Exemption = Lower of LTCG or cost of new house
• From FY 2023-24: Maximum exemption cap of ₹10 crore on LTCG
• If you cannot invest before the ITR due date — deposit the LTCG amount in a Capital Gains Account Scheme (CGAS) account with a scheduled bank before filing ITR

Section 54F — LTCG from Any Other Long-Term Capital Asset

• Applies when: You sell any long-term capital asset other than a residential house — such as shares, gold, land, commercial property, mutual funds — and invest in a new residential house
• Exemption: Invest the entire net sale consideration (not just LTCG) in a new residential house
• Proportional exemption if partial investment: Exemption = LTCG × (Cost of new house / Net sale consideration)
• Time limits: Same as Section 54 — 1 year before, 2 years after for purchase; 3 years for construction
• Cap: From FY 2023-24, maximum LTCG exemption under 54F is ₹10 crore

Key Conditions for Both Sections

• The taxpayer must not own more than one residential house (other than the new house) at the time of transfer
• The new house must not be sold within 3 years of purchase/construction — else exemption is reversed and LTCG becomes taxable in the year of sale
• Deposit in CGAS if investment not made before ITR filing date — must be utilised within prescribed time

Conclusion

Sections 54 and 54F can eliminate tax on large capital gains if structured correctly — with timely investment in a new residential house or CGAS deposit. SPOTON provides capital gains tax computation, exemption planning and ITR filing for property and investment transactions across Kerala. Contact us for expert capital gains tax advisory.