Section 54 Capital Gains Exemption FY 2025-26: Reinvesting House Sale Proceeds, 54F and 54EC Compared
Section 54 exempts long-term capital gains from the sale of a residential house if you buy another residential house in India within 1 year before or 2 years after the sale, or construct one within 3 years. The exemption is the lower of the gain and the cost of the new house, capped at ₹10 crore. Unused gain must be parked in a Capital Gains Account Scheme deposit before the return due date. Section 54F does the same for other assets but requires the full net sale consideration to be reinvested, and section 54EC allows up to ₹50 lakh in specified bonds within 6 months.
Key facts, FY 2025-26
- Asset sold
- Residential house held more than 24 months (long-term)
- Reinvest in
- One residential house in India (two houses once in a lifetime if gain is up to ₹2 crore)
- Time limit
- Purchase 1 year before or 2 years after the sale; construction within 3 years
- Exemption
- Lower of capital gain and cost of new house, maximum ₹10 crore
- Unused amount
- Deposit in Capital Gains Account Scheme before the ITR due date
- Lock-in
- New house must not be sold within 3 years, else the exemption is reversed
How it works
When you sell a residential house you have held for more than 24 months, the profit is a long-term capital gain taxed at 12.5% without indexation, or at 20% with indexation if you bought the property before 23 July 2024 and that works out lower. Section 54 of the Income-tax Act 1961 lets an individual or HUF avoid that tax entirely by putting the gain into another residential house.
The window is generous but fixed. You can buy the new house up to one year before the sale or within two years after it, or complete construction within three years of the sale. The new house must be in India. The exemption equals the capital gain or the cost of the new house, whichever is lower, subject to a ceiling of ₹10 crore introduced from FY 2023-24. Only the gain needs reinvesting, not the whole sale price.
If you have not spent the gain by the date your return is due, usually 31 July, deposit the unused amount in a Capital Gains Account Scheme (CGAS) account with an authorised bank and claim the exemption on that basis. Draw on it to buy or build within the time limit. Anything left unspent after three years is taxed as capital gain in that year. If you sell the new house within three years, the exemption you claimed reduces its cost, so the tax comes back.
Section 54F covers the sale of any other long-term asset, such as land, gold or unlisted shares, when the proceeds go into a residential house. The difference is that 54F requires you to reinvest the entire net sale consideration, not just the gain, and you must not own more than one other residential house on the sale date. Section 54EC is the bond route: invest the gain, up to ₹50 lakh, in REC, PFC, IRFC or NHAI bonds within six months of the sale. The bonds are locked for five years and the interest is taxable.
| Section 54 | Section 54F | Section 54EC | |
|---|---|---|---|
| Asset sold | Residential house | Any long-term asset other than a residential house | Land or building (any long-term) |
| Reinvest in | Residential house in India | Residential house in India | REC, PFC, IRFC, NHAI bonds |
| Amount to reinvest | Capital gain | Entire net sale consideration (proportionate exemption if less) | Capital gain |
| Time limit | 1 year before, 2 years after; 3 years to construct | 1 year before, 2 years after; 3 years to construct | 6 months from sale |
| Cap | ₹10 crore | ₹10 crore | ₹50 lakh per financial year |
| Lock-in | 3 years | 3 years, and no second house purchase within 2 years | 5 years |
| Who | Individual, HUF | Individual, HUF | Any taxpayer |
Worked example: Flat in Chandigarh bought in 2015 for ₹60 lakh, sold in FY 2025-26 for ₹1.50 crore
- Sale consideration
- ₹1,50,00,000
- Cost of acquisition
- ₹60,00,000
- Long-term capital gain (without indexation)
- ₹90,00,000
- Tax at 12.5% plus cess if nothing is reinvested
- ₹11,70,000
- New house purchased within 2 years
- ₹1,10,00,000
- Exemption under section 54 (lower of gain and cost)
- ₹90,00,000
- Taxable capital gain
- Nil
Common mistake: missing the CGAS deadline
The most expensive error is holding the sale money in a savings account past the return due date while searching for a house. Once 31 July passes without a CGAS deposit, the exemption for the unspent portion is lost even if you buy a house the next month. Open the CGAS account in July, deposit the unused gain, and file the return claiming it. The second common error is under 54F: reinvesting only the gain from a plot sale and expecting full exemption. 54F needs the whole net consideration.
What to do next
Gather the purchase deed, the sale deed, brokerage and stamp duty receipts and proof of any improvement cost. If the buyer paid ₹50 lakh or more, check that the 1% TDS under section 194-IA appears in Form 26AS against your PAN. Decide before the return due date whether you will buy, build, or use bonds, and open a CGAS account for any gain you cannot deploy in time. Report the sale in Schedule CG of ITR-2 with the exemption in the section 54 row. Property gains, the choice between 12.5% and indexed 20%, and the CGAS mechanics are the area where an expert-assisted return earns its fee.
Section 54: questions
What is the exemption under section 54?
Long-term capital gain from the sale of a residential house is exempt to the extent it is reinvested in one residential house in India, bought within 1 year before or 2 years after the sale or constructed within 3 years. The exemption is the lower of the gain and the cost of the new house, capped at ₹10 crore.
Do I have to reinvest the full sale price under section 54?
No. Under section 54 only the capital gain needs to be reinvested. Under section 54F, which covers assets other than a residential house, the entire net sale consideration must be reinvested for full exemption.
What is the Capital Gains Account Scheme?
A deposit account with an authorised bank where you park the unspent capital gain before the ITR due date, so the exemption is preserved while you find or build a house. Withdrawals must be used for the house within the 2 or 3 year limit; the balance after that is taxed.
Can I buy two houses under section 54?
Once in a lifetime, yes, if the long-term capital gain does not exceed ₹2 crore. Otherwise the exemption is for one residential house.
How much can I invest in 54EC bonds?
Up to ₹50 lakh in a financial year in bonds of REC, PFC, IRFC or NHAI, within six months of the sale. The bonds are locked in for 5 years and the interest is taxable at slab rates.
What happens if I sell the new house within 3 years?
The exemption claimed is deducted from the cost of the new house when computing its capital gain, so the earlier gain effectively becomes taxable in the year of the second sale, usually as a short-term gain at slab rates.
Is the rate on property LTCG 12.5% or 20% for FY 2025-26?
12.5% without indexation. For property bought before 23 July 2024, resident individuals and HUFs can instead pay 20% with indexation if that gives a lower tax. Section 54 exemption applies under either computation.
Can an NRI claim section 54?
Yes. Sections 54, 54F and 54EC are available to NRIs for property in India, provided the new house is in India. The buyer deducts TDS at the full LTCG rate on the sale price, so an NRI should apply for a lower deduction certificate under section 197 before the sale.
Related sections and forms
- ITR-2ITR-2 is the return for individuals and HUFs who have no income from business or profession but do not fit ITR-1: capital gains from shares, mutual funds, property or crypto, more than one house property, income above ₹50 lakh, foreign assets or foreign income, NRI or RNOR status, a directorship, unlisted shares, or losses to carry forward. It is due on 31 July 2026 for AY 2026-27 and has no profit and loss account.
- Form 26QBForm 26QB is the challan-cum-statement a buyer files to deposit 1% TDS under section 194-IA when buying immovable property (other than rural agricultural land) for ₹50 lakh or more, or where the stamp duty value is ₹50 lakh or more. It is due within 30 days from the end of the month in which the payment was made, needs no TAN, and is filed once per buyer-seller pair for each instalment. The buyer then downloads Form 16B from TRACES and gives it to the seller.
- Form 26ASForm 26AS is your annual tax statement: every rupee of TDS and TCS credited to your PAN, the advance tax and self-assessment tax you paid, and the refunds issued, for one financial year. You open it from the e-filing portal, which hands you over to TRACES. Before filing ITR for AY 2026-27, the TDS you claim must match what 26AS shows, or the credit is cut in the 143(1) intimation.
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General information for FY 2025-26, not professional advice. Limits and dates change with each Budget; the updated date above is when this page was last checked. Disclaimer