Quick answer: If you sell a house you held for more than 24 months and reinvest the profit in another house in India within the set time limit, Section 54 lets you pay zero tax on the reinvested part of the gain. The exemption is capped at Rs 10 crore, and you must buy within 1 year before or 2 years after the sale, or build within 3 years.
Section 54 of the Income-tax Act lets individuals and HUFs skip long-term capital gains tax on the sale of a residential house when they reinvest the gain in another residential house in India. Buy within 1 year before or 2 years after the sale, or construct within 3 years, and the reinvested gain is fully exempt up to a Rs 10 crore cap.
What is Section 54 capital gains exemption?
Section 54 is the main tax break for people who sell one house and buy another. When you sell a residential house held for more than 24 months, the profit is a long-term capital gain (LTCG). Without any exemption, that gain is taxed at 12.5% for sales on or after 23 July 2024 (Budget 2024 rate, with no indexation benefit).
Section 54 removes that tax on the part of the gain you put into a new house. You do not need to reinvest the full sale price — only the gain. If your gain is Rs 40 lakh and you spend Rs 40 lakh or more on the new house, the whole gain is exempt. If you spend less, only the amount you spent is exempt and the rest is taxed.
The section applies only to individuals and Hindu Undivided Families (HUFs). Companies, firms and LLPs cannot use it. The house you sell must be a residential house whose income is taxed under Income from House Property. The new house must also be residential and located in India. A flat abroad or a shop does not qualify. If you take a home loan for the new house, the interest gets separate tax treatment — see our home loan tax benefits guide.
What changed under the Income-tax Act, 2025?
The Income-tax Act, 2025 renumbers the old sections but keeps the Section 54 rules the same in substance. Old Section 54 is now Section 82 of the 2025 Act. The related exemptions moved too: Section 54F is now Section 86, and Section 54EC (capital gains bonds) is now Section 85.
One timing point matters. For gains in FY 2025-26, reported in the AY 2026-27 return, you still use the old 1961 Act section numbers. The new numbering applies to gains arising from 1 April 2026 onward (tax year 2026-27). So on this year’s return, write Section 54. From next year, the same claim is Section 82.
Who can claim Section 54 exemption?
You can claim it only if all of these are true:
- You are an individual or a HUF.
- The asset sold is a residential house held for more than 24 months, so the gain is long-term.
- The income from that house was taxable as house property income.
- You reinvest the gain in another residential house in India within the time limit.
- You do not sell the new house within 3 years of buying or building it.
If you sell a house held for 24 months or less, the gain is short-term and taxed at your slab rate. No Section 54 exemption is available on short-term gains.
Time limit to buy or construct a new house
The deadlines are strict. Missing even one of them can cost you the full exemption.
| Action | Deadline from date of sale |
|---|---|
| Purchase of a new house | Within 1 year before, or 2 years after, the sale |
| Construction of a new house | Within 3 years after the sale |
The “1 year before” rule helps people who buy first and sell later. If you bought your new flat 8 months before selling the old one, that purchase still qualifies. For construction, what counts is completion within 3 years — booking an under-construction flat only works if construction finishes inside the window.
How much exemption do you get?
The exemption is the lower of two numbers: your long-term capital gain, or the cost of the new house. Since Finance Act 2023, the cost counted for exemption is capped at Rs 10 crore. If you buy a Rs 12 crore house, only Rs 10 crore counts toward the exemption.
Worked example — partial reinvestment:
- Sale price of old flat: Rs 1.20 crore
- Purchase price in 2015: Rs 45 lakh
- Long-term capital gain: Rs 75 lakh
- New house bought for: Rs 60 lakh
- Exemption under Section 54: Rs 60 lakh (the lower figure)
- Taxable gain left: Rs 15 lakh
- Tax at 12.5%: Rs 1,87,500, plus 4% cess = Rs 1,95,000
- Without Section 54, tax on Rs 75 lakh would be Rs 9,37,500 plus cess = Rs 9,75,000
- Tax saved: Rs 7,80,000
Worked example — full exemption:
- Capital gain: Rs 40 lakh
- New house cost: Rs 45 lakh
- Exemption: full Rs 40 lakh, because the new house cost more than the gain
- Tax on this gain: nil
Can you buy two houses under Section 54?
Yes, but only in a narrow case. If your total capital gain is Rs 2 crore or less, you can split the reinvestment across two residential houses. This option is available only once in your lifetime. If you use it now, you can never use it again, so pick the right sale for it.
If your gain is above Rs 2 crore, the exemption covers only one new house. The Rs 2 crore two-house rule came in with the Finance Act 2019.
What if you cannot buy before filing your ITR?
This is where the Capital Gains Account Scheme (CGAS) comes in. If you have not reinvested the gain by the ITR filing due date for the year of sale, deposit the unutilised gain in a CGAS account at a notified bank before that due date. The deposit keeps your exemption claim alive while you search for a house.
You must then use the CGAS money for the purchase or construction within the original window — 2 years for purchase, 3 years for construction. If any deposited amount is still unused when the window ends, it becomes taxable as a long-term capital gain in the year the window expires. CGAS money can only be used for the new house, not for other spending.
What happens if you sell the new house within 3 years?
The exemption is withdrawn. If you transfer the new house within 3 years of its purchase or construction, the exempted gain is taxed as a long-term capital gain in the year you sell the new house. The cost of the new house is also reduced by the exempted amount when working out the gain on that second sale. In plain terms: the tax you saved comes back. Hold the new house for at least 3 years to keep the benefit safe.
Section 54 vs 54F vs 54EC: which one fits your sale?
These three exemptions are often mixed up. Here is the simple split:
- Section 54 (now Section 82): You sold a residential house. Reinvest only the capital gain in another house. The rest of the sale money is yours to keep.
- Section 54F (now Section 86): You sold any other long-term asset — land, shares, gold — and want to buy a house. Here you must invest the full net sale consideration, not just the gain, to get full exemption. If you invest only part, the exemption is proportionate. Also, on the date of transfer, you must not own more than one residential house other than the new one.
- Section 54EC (now Section 85): You do not want to buy property at all. Invest the gain in specified bonds from NHAI, REC, PFC or IRFC within 6 months of the sale. The cap is Rs 50 lakh per financial year, the lock-in is 5 years, and the bond interest (around 5-6%) is taxable at your slab rate.
Section 54EC works for gains from any long-term asset, including land and buildings. It is the fallback when you cannot find a house in time, but the Rs 50 lakh cap limits it for large gains.
By the numbers
- 12.5% — LTCG tax rate on property sold on or after 23 July 2024, without indexation (Budget 2024).
- Rs 10 crore — maximum cost of the new house counted for Section 54 exemption, since Finance Act 2023.
- Rs 2 crore — gain ceiling for the once-in-a-lifetime two-house option (Finance Act 2019).
- Rs 50 lakh — per-year cap on Section 54EC bond investment, with a 5-year lock-in.
- 376 — Cost Inflation Index notified by CBDT for FY 2025-26, used for indexation on property bought before 23 July 2024 where the 20% with-indexation option applies.
Common mistakes that lose the exemption
- Buying abroad. A house outside India never qualifies, even if you are an NRI seller.
- Buying a commercial property. Shops and offices do not count as a residential house.
- Missing the CGAS deadline. If you cannot reinvest before the ITR due date and you skip the CGAS deposit, the exemption is lost for the unutilised part.
- Selling the new house too soon. A sale within 3 years pulls the exemption back into tax.
- Using the two-house option twice. It is once in a lifetime. A second attempt is denied.
- Claiming on a short-term gain. Property held 24 months or less gives no Section 54 relief at all.
- Forgetting the 1% TDS on purchase. When you buy property worth Rs 50 lakh or more, the buyer must deduct 1% TDS under Section 194-IA. It is separate from the exemption but easy to miss in the same transaction.
How to claim Section 54 in your ITR
Report the sale under the Capital Gains schedule of your return (ITR-2 for most individuals with house property gains). Show the full long-term gain, then claim the Section 54 exemption for the reinvested amount. Keep these documents ready: sale deed of the old house, purchase or construction agreement for the new house, payment proofs, CGAS deposit challan if you used one, and the completion certificate for a constructed house. The tax department can ask for proof of both the timelines and the amounts.
Frequently asked questions
Who can claim Section 54 exemption?
Only individuals and HUFs. Companies, partnership firms and LLPs cannot claim it, even if they sell a residential property. The asset sold must be a long-term residential house, held for more than 24 months.
How much tax exemption can I get under Section 54?
The exemption is the lower of your capital gain or the cost of the new house, capped at Rs 10 crore of new-house cost. If the new house costs more than your gain, the full gain is exempt. If it costs less, only the amount spent is exempt and the balance is taxed at 12.5%.
What is the time limit to buy a new house under Section 54?
You must purchase within 1 year before or 2 years after the sale date, or construct within 3 years after the sale date. If you cannot meet the deadline before your ITR due date, deposit the unutilised gain in a Capital Gains Account Scheme account first.
Can I buy two houses and claim Section 54 on both?
Yes, if your capital gain is Rs 2 crore or less, you can buy or build two houses and claim exemption on both. This is a once-in-a-lifetime option. If your gain is above Rs 2 crore, only one house qualifies.
What happens if I do not reinvest before filing my ITR?
Deposit the unutilised capital gain in a Capital Gains Account Scheme account at a notified bank before the ITR filing due date for the year of sale. You can then withdraw it for the purchase or construction within the original 2-year or 3-year window. Unused money becomes taxable when the window ends.
What if I sell the new house within 3 years?
The exemption is withdrawn. The gain you had sheltered becomes taxable as a long-term capital gain in the year you sell the new house, and the new house’s cost is reduced by the exempted amount for that calculation.
Does Section 54 apply to a house bought outside India?
No. The new residential house must be situated in India. A property abroad does not qualify, and neither does a commercial property such as a shop or office.
Which is better: Section 54, 54F or 54EC bonds?
It depends on what you sold. Sold a house and buying another house? Use Section 54. Sold shares or land and buying a house? Use Section 54F, but note you must invest the full sale amount, not just the gain. Do not want property? Put up to Rs 50 lakh in 54EC bonds within 6 months. For gains above Rs 50 lakh with no house purchase planned, 54EC alone will not shelter everything.
Official sources
- Income Tax Department e-filing portal: https://www.incometax.gov.in
- Income Tax Department (Acts, rules and circulars): https://www.incometaxindia.gov.in
Reviewed by Asuthod Rathod, CA
Last updated: 29 October 2026
Disclaimer: This article is for general information only and is not tax advice. Tax rules depend on your facts, and section numbers change with the new Act. Check the current provisions or speak to a chartered accountant before acting on a large property transaction.
Editorial byline for eircicai income tax guides — covering the Income Tax Act, 2025, section renumbering, regime comparison, and deductions. Content is reviewed by Asuthod Rathod, CA.