Section 54F: A Smarter Way to Save LTCG Tax

When you sell long-term investments, such as shares, mutual funds, gold, or land, the resulting profits are classified as long-term capital gains (LTCG). From FY 2025–26 onwards, most long-term capital gains are taxed at a flat rate of 12.5% without indexation benefits. While this simplifies taxation, it can also increase the tax burden for investors with significant gains.

To balance this, the Income Tax Act provides Section 54F, a provision that allows eligible taxpayers to reduce or fully eliminate long-term capital gains tax by reinvesting the sale proceeds into a residential house property in India.

This blog explains Section 54F in detail covering eligibility, conditions, timelines, the ₹10 crore exemption cap, and compliance requirements.

What Is Section 54F?

Section 54F of the Income Tax Act provides an exemption from long-term capital gains tax when the gains arise from the sale of a long-term capital asset (Long term asset can be defined like asset with holding period of 24 months or more except for listed securities where it is 12 months or more) other than a residential house, provided the net sale proceeds are invested in one residential house property in India.

This section applies to capital gains arising from assets such as:

• Listed and unlisted shares
• Equity and debt mutual funds
• Gold and jewellery
• Bonds and debentures
• Land (not being a residential house)

The purpose of Section 54F is to encourage taxpayers to reinvest financial gains into housing, thereby supporting long-term asset creation and financial stability.

Who Can Claim Exemption Under Section 54F?

The exemption under Section 54F is available only to:

• Individuals, and
• Hindu Undivided Families (HUFs)

There is no restriction based on residential status, which means resident Indians as well as Non-Resident Indians (NRIs) can claim this exemption, provided all conditions are fulfilled.

Entities such as companies, LLPs, partnership firms, trusts, or associations of persons are not eligible for exemption under this section.

Point to Note: Capital Gain = Sale Price – (Cost of Acquisition + Cost of Improvement + Expenses Incurred on Transfer), where Sale Price = The total amount you receive from the sale of the asset, Cost of Acquisition = The original price you paid for the property, including incidental costs like stamp duty and registration fees, Cost of Improvement = Capital expenses incurred to make additions or structural alterations to the asset that increase its value (e.g., adding a room, a new roof), not routine repairs, and Expenses Incurred on Transfer = costs related to include legal fees, brokerage or agent commission, stamp duty or transfer fees, and any other expenditure incurred wholly and exclusively in connection with the sale.

How is Exemption Under Section 54F Calculated?

The exemption under Section 54F is available on a proportionate basis. This means the tax benefit depends on how much of the net sale consideration is invested in the residential property. If only part of the sale proceeds is invested, the exemption is allowed in the same proportion.

The exemption is calculated using the following formula:
Section 54F Exemption = Long-term Capital Gain × (Amount invested in the residential property ÷ Net sale consideration)

Assets Covered Under Section 54F

To qualify for exemption:

• The asset sold must be a long-term capital asset, and
• It must not be a residential house property

If the asset sold is a residential house, Section 54F does not apply; such cases fall under Section 54 instead. Section 54F is specifically designed for gains arising from non-residential assets.

Key Highlights of Section 54F

Some of the most important features of Section 54F are:

• Proportionate exemption: Only the portion of net sale proceeds invested in the new residential property qualifies for exemption
• Property location: The new residential house must be situated in India
• Single property restriction: Exemption is allowed for investment in only one residential house
• Availability to NRIs: Non-resident taxpayers are also eligible
• ₹10 crore cap: Maximum exemption allowed is limited to ₹10 crore of reinvested sale proceeds

Can You Claim Section 54F Tax Benefits if the House is Jointly Owned?

Yes. You can purchase the new residential property in joint names (for example, adding your spouse as a co-owner) and still claim capital gains tax exemption, provided the primary seller (the one who earned the capital gains) is one of the owners and invests the requisite amount.

The tax exemption under Section 54/54F will correspond to the portion of investment made by the seller claiming the benefit. In practice, this means if the entire capital gain amount is reinvested by that seller (even if the property is co-owned), the exemption can be claimed on the full eligible amount. However, if the co-owner (e.g., spouse) also contributes funds and holds a share in the purchase, then the exemption for the seller will be limited to their share of ownership/investment in the property.

Can You Invest Capital Gains for Under Construction Property and Claim Tax Exemption?

Yes. Investing your capital gains in an under-construction residential property is permissible for claiming the tax exemption, but there are strict timelines. The Income Tax Act mandates that the construction of the new property must be completed (and possession taken) within 3 years from the date of sale of the original property.

Is There a Restriction on Time Period in Terms of Property Sale?

Yes. The new property comes with a minimum holding period to retain the tax benefit. Under Section 54/54F rules, you must not sell the newly purchased or constructed house for at least 3 years from the date of purchase (or construction completion). If you sell or transfer the new property within three years, the capital gains exemption granted earlier will be rolled back or withdrawn.

Investment Conditions Under Section 54F

1. Investment of Net Sale Consideration

To claim the exemption, the taxpayer must invest the net sale consideration (sale value minus expenses such as brokerage or legal costs) in the purchase or construction of a residential house.

The exemption amount depends on how much of the net consideration is invested:

• If the entire net consideration is invested, the entire capital gain is exempt
• If only a portion is invested, the exemption is allowed proportionately

2. Time Limits for Purchase or Construction

The Income Tax Act prescribes strict timelines for reinvestment:

• Purchase of residential house:
  - Up to 1 year before the date of sale, or
  - Within 2 years after the date of sale
• Construction of residential house:
  - Must be completed within 3 years from the date of sale

Ownership Conditions to Be Met

1. Ownership on the Date of Sale

On the date of transfer of the original asset, the taxpayer must not own more than one residential house, excluding the new house to be acquired

If the taxpayer already owns two or more residential houses on the sale date, exemption under Section 54F is not available.

2. Restriction on Additional Property Purchases

After claiming exemption under Section 54F, the taxpayer must not:

• Purchase another residential house within 2 years, or
• Construct another residential house within 3 years

If this condition is violated, the exemption claimed earlier becomes taxable in the year in which the additional house is acquired or constructed.

Capital Gains Account Scheme (CGAS)

If the sale proceeds are not fully utilised for purchasing or constructing a residential house before the due date of filing the income tax return, the unutilised amount must be deposited before due date of filing of the ITR for the FY in which such exemption is claimed into a Capital Gains Account Scheme (CGAS) with a notified bank.

Depositing funds into CGAS:

• Allows the taxpayer to claim exemption while filing the return
• Ensures compliance with reinvestment timelines

Any amount not utilised from CGAS within the prescribed period (within 2 years after the date of transfer for purchase or to construct a residential house within 3 years of the date of transfer) becomes taxable as long-term capital gains.

₹10 Crore Exemption Cap Under Section 54F

From FY 2024–25 onwards, the government introduced a ₹10 crore cap on the maximum exemption available under Section 54F.

For FY 2025–26:

• The exemption is limited to ₹10 crore of net sale proceeds invested in the residential house or deposited in CGAS
• Any capital gains attributable to investment beyond ₹10 crore will be taxable

This amendment aims to balance tax benefits while preventing excessive exemptions on high-value property investments.

When Does the Section 54F Exemption Get Withdrawn?

The exemption claimed under Section 54F becomes taxable if:

• The new residential house is sold within 3 years of purchase or completion
• Another residential house is purchased or constructed within the restricted period
• CGAS funds are not utilised within the allowed timeframe

In such cases, the exempted capital gains are taxed in the year of violation.