Capital Gains Exemption on Sale of Residential House
Section 54 exempts long-term capital gains on sale of a residential house when the gains are reinvested in another residential house in India within prescribed timelines — the cornerstone of property tax planning and a fixture of capital-gains exam problems.
The provision, in plain terms
Where an individual or HUF transfers a long-term residential house and, within one year before or two years after the transfer purchases — or within three years constructs — one residential house in India, the capital gain is exempt to the extent invested. Gains up to ₹2 crore may be invested in two houses once in a lifetime. Unutilised amounts by the return-filing due date must be parked in the Capital Gains Account Scheme. The new house must be held for three years, else the exemption reverses. Exemption is capped at ₹10 crore of investment (Finance Act 2023).
Points worth memorising
- Asset sold: long-term residential house property; claimant: individual or HUF only.
- Timeline: purchase within 1 year before or 2 years after; construct within 3 years of transfer.
- Two-house option: gains ≤ ₹2 crore can be spread over two houses, exercisable once in a lifetime.
- CGAS deposit before the return due date preserves the exemption for amounts not yet invested.
- Lock-in: selling the new house within 3 years reverses the exemption; investment cap ₹10 crore.
How the exam tests it
Capital-gains computations with 54/54F/54EC comparisons are a recurring 8–10 mark block in CA Intermediate Taxation and Final Direct Tax; the two-house option and CGAS mechanics are current-favourite twists.
Tested at: intermediate · final
Related sections
Have questions?
Find answers.
Still unsure about something? We're happy to help you figure it out.
Talk to usWhat is the difference between section 54 and 54F?
Section 54 applies when a residential house is sold and gains are reinvested in a house (exemption proportional to gain invested); 54F applies when any other long-term asset is sold and the net consideration is invested in a house (exemption proportional to consideration invested).
Can I buy a house abroad and claim section 54?
No — since AY 2015-16 the new residential house must be situated in India.