Section 54 Under the Income Tax Act: Capital Gains Exemptions

Overview

Section 54 Under the Income Tax Act provides relief from long-term capital gains tax when gains earned from the sale of a residential house property are reinvested in another eligible residential house. This reinvestment transaction must be made 1 year before or 2 years after the transfer date. For a house under construction, the time limit is 3 years from the transfer date. From AY 2024-25 onwards, the maximum exemption under Section 54 is capped at ₹10 crore. This cap was introduced by the Finance Act, 2023. Under the Income Tax Act, 2025, effective from 1 April 2026, this provision has been reorganized under Section 82 while retaining substantially similar conditions.

This article explains the exemption rules under both Section 54 and Section 82 to help taxpayers understand the updated reference clearly.

What is Section 54 of the Income Tax Act? (Now Section 82)?

Section 54 of the Income Tax Act aims to encourage reinvestment in residential properties by offering tax relief on capital gains. It’s designed for individuals and HUFs selling a residential house, with clear rules on reinvestment timelines and conditions. Under the Income Tax Act, 2025, this provision has been reorganized as Section 82, while its key conditions and benefits continue to remain the same.

Eligibility Criteria for Section 54 Under the Income-tax Act

Conditions for Claiming Exemption Under Section 54

To obtain the benefit of Section 54 Under the Income Tax Act, the following conditions must be followed:

• You must be an eligible taxpayer belonging to the individual or Hindu Undivided Family (HUF) category.
• The asset you sell should be a residential house property. It should be held as a long-term asset, which means for over 2 years.
• You must earn capital gains. There is no provision for exemption if you do not make profits from selling the residential property.
• You must reinvest in another home, either through purchase or construction. The new property’s transaction should be completed within the time limit allowed under Sec 54.

The Finance Act, 2020 amended Section 54 with effect from Assessment Year 2021-22 to extend the benefit of exemption in respect of investments made in two residential house properties. If the amount of long-term capital gains does not exceed ₹2 crore, an exemption shall be available for investments made through the purchase or construction of two residential house properties. If the assessee exercises this option, it cannot be exercised again for the same or any subsequent assessment year.

With effect from Assessment Year 2024-25, the maximum exemption available under Section 54 is restricted to ₹10 crore. If the cost of the new residential property exceeds ₹10 crore, the excess amount shall be ignored while computing the exemption.

Capital Gains Account Scheme (CGAS) Under Section 54 Under the Income Tax Act

If a taxpayer is unable to utilize the capital gains for purchasing or constructing a new residential property before filing the income tax return, the unutilized amount may be deposited under the Capital Gains Account Scheme (CGAS). The deposit must be made before the due date of filing the return under Section 139(1). The amount deposited must be used within the prescribed time limit for acquiring or constructing a residential house. Any amount not utilized after the specified period may become taxable in the year in which the time limit expires.

How is Exemption Under Section 54 Under the Income Tax Act Calculated?

The exemption available under Section 54 Under the Income Tax Act is either lower of:

• The long-term capital gain arising from the sale of the residential property; or
• The cost of the new residential property purchased or constructed.

Any remaining capital gain will be taxable. For example, if the long-term capital gain is ₹30 lakh and the cost of the new residential property is ₹25 lakh, the exemption available under Section 54 will be limited to ₹25 lakh, and the remaining ₹5 lakh will be taxable.

Example of ₹10 Crore Exemption Limit:

If the long-term capital gain is ₹15 crore and the taxpayer invests ₹15 crore in a new residential property, the exemption under Section 54 will still be restricted to ₹10 crore. The remaining ₹5 crore of capital gain will remain taxable, as the Finance Act, 2023 capped the maximum exemption at ₹10 crore from AY 2024-25 onwards.

Different Types of Capital Assets under the Income Tax Act

Capital assets are divided into two key categories for capital gains:

Short-term capital assets :

For residential house property, land, and buildings, assets held for 24 months or less are treated as short-term capital assets. Short-term capital gains are the profits earned from the sale of such assets.

Long-term capital assets :

For residential house property, land, and buildings, assets held for more than 24 months are treated as long-term capital assets. Long-term capital gains are the profits earned from the sale of such assets.

Consequences if a Taxpayer Transfers a New House Property Within 3 Years

If the new residential house purchased or constructed under Section 54 is transferred within 3 years from the date of its purchase or construction, the exemption claimed earlier is adjusted while calculating capital gains on the sale of the new house.

For this purpose, the cost of acquisition of the new house is reduced by the amount of exemption claimed under Section 54. If the exemption claimed is equal to or more than the cost of the new house, the cost of acquisition may be treated as nil while calculating capital gains.

Comparison Between Section 54 and Section 54F

Although both Section 54 and Section 54F provide exemption from long-term capital gains tax, they apply to different types of capital assets and have different eligibility conditions. The table below highlights the key differences between the two provisions.

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Conclusion

Section 54 Under the Income Tax Act, the provisions corresponding to Section 82 under the Income Tax Act, 2025, continue to provide valuable tax relief on long-term capital gains arising from the sale of residential property. Taxpayers can claim exemption by purchasing or constructing another residential property within the prescribed timelines or by depositing the amount under the Capital Gains Account Scheme (CGAS). Proper planning of property transactions, timely reinvestment, and correct utilization of CGAS can help taxpayers maximize exemption under Section 54 and reduce long-term capital gains tax liability.

Suggested Reads:

Section 82 of Income Tax Act

Frequently Asked Questions