[Section 54]- Capital Gains Exemption on Sale of Residential House Property

Section 54 of the Income Tax Act, 1961 provides tax exemption on long-term capital gains (LTCG) arising from the sale of a residential house property, if the proceeds are reinvested in another residential property.

1. Eligibility Conditions

✅ Asset Sold: Must be a residential house property (not commercial/land).

✅ Holding Period: Property must be held for >24 months (LTCG applies).

✅ Reinvestment: Must purchase/construct another residential house in India.

2. Exemption Calculation

• Exemption Amount= Capital Gain or Investment in New Property, whichever is lower.
• Full Exemption: If the entire capital gain is reinvested.
• Partial Exemption: If only part of the gain is reinvested, the balance is taxable.

Example:

• Sale Price: ₹1.2 Crore
• Purchase Cost (Indexed): ₹60 Lakh
• Capital Gain: ₹60 Lakh
• Reinvestment in New House: ₹70 Lakh
• Taxable Gain: ₹0(Full exemption since reinvestment > gain).

3. Time Limits for Reinvestment

Note: If construction is delayed beyond 3 years, the exemption is revoked, and tax becomes payable.

4. Conditions & Restrictions

✔ Only One New House Allowed: Cannot claim exemption for multiple properties.

✔ No Commercial Use: The new property must be residential (not rented out for business).

✔ One-Time Benefit per Sale: Cannot split gains across multiple properties.

5. What If the New Property is Sold Later?

• Lock-in Period: The new property must not be sold within 3 years.
• Tax Implication: If sold earlier, the exemption is reversed, and the original capital gain becomes taxable.

6. Comparison with Section 54F

7. Documents Required for Claiming Exemption

• Sale Deed(old property).
• Purchase Agreement/Construction Proof(new property).
• Bank Statements(proof of reinvestment).
• Completion Certificate(if constructing).