Claiming Capital Gains Exemption Under Sections 54, 54F, 54EC

A capital gain on the sale of property, equity (other than equity that already enjoys the Rs 1.25 lakh / 12.5% LTCG rule under Section 112A), gold or other long-held assets can attract long-term capital gains tax of 12.5% (without indexation in most cases under the post-July 2024 regime). On a property sale of Rs 2 crore with a Rs 80 lakh gain, that is Rs 10 lakh of tax. Three sections in the Income Tax Act, Section 54, Section 54F and Section 54EC, allow you to defer or eliminate this tax through reinvestment.

This guide covers all three, side by side, with the documentation, time limits and the Capital Gains Account Scheme path that lets you preserve the exemption when the new house is not yet ready.

The Three Sections at a Glance

Section 54: Sell One House, Buy Another

Section 54 is the cleanest exemption available to homeowners selling a long-term residential property and buying another.

Conditions:

• The seller is an Individual or HUF.
• The asset sold is a residential house held for more than 24 months (long-term).
• The new residential house is purchased in India.
• Purchase happens within 1 year before or 2 years after the date of sale, or construction is completed within 3 years from the date of sale.
• The new house is not transferred for at least 3 years after acquisition.

How much is exempt:

• If the cost of the new house is greater than or equal to the capital gain, the entire capital gain is exempt.
• If the cost is lower, only the amount equal to the new house cost is exempt.
• Capped at Rs 10 crore per assessee (effective from AY 2024-25).

Worked Example

Priya sold her flat in Hyderabad on 15 May 2025 for Rs 1,80,00,000. She bought it long before 23 July 2024 and chose the 20% with indexation option; her indexed cost was Rs 80,00,000. Long-term capital gain: Rs 1,00,00,000.

She buys a new flat for Rs 1,20,00,000 on 10 December 2025.

Cost of new house (Rs 1.20 crore) is more than the gain (Rs 1 crore), so the entire Rs 1 crore is exempt under Section 54. Her LTCG tax on this sale is zero.

"Two Houses" Option

If the long-term capital gain does not exceed Rs 2 crore, the seller can claim the exemption by purchasing or constructing two residential houses instead of one, but only once in a lifetime. This was introduced from FY 2019-20.

Section 54F: Sell Anything Else, Buy a House

Section 54F applies when you sell a long-term capital asset that is not a residential house (shares not under Section 112A, plot of land, gold, paintings, etc.) and reinvest in a residential house.

Conditions:

• The seller is an Individual or HUF.
• The asset sold is long-term and is not a residential house.
• The new residential house is purchased in India within 1 year before or 2 years after the sale, or constructed within 3 years.
• On the date of sale, the assessee should not own more than one residential house (other than the new one being purchased).
• The assessee does not purchase another residential house within 2 years (or construct within 3 years) of the date of sale, other than the new one used for this exemption.

How much is exempt:

• If the cost of the new house is greater than or equal to the net consideration (sale value minus expenses), the entire capital gain is exempt.
• If the cost is lower, the exemption is proportional: (Cost of new house / Net consideration) x Capital gain.
• Capped at Rs 10 crore.

The proportional formula is the key difference from Section 54. Section 54 looks only at gain vs new house cost. Section 54F requires the entire net consideration to be reinvested for full exemption.

Worked Example

Dilip sold unlisted shares (held for 18 years) for Rs 1,00,00,000. Cost: Rs 20,00,000 (indexation is not available for shares on transfers from 23 July 2024). Long-term capital gain: Rs 80,00,000.

He buys a new house for Rs 60,00,000 within 2 years.

Exempt under Section 54F: (60,00,000 / 1,00,00,000) x 80,00,000 = Rs 48,00,000. Taxable LTCG: Rs 80,00,000 minus Rs 48,00,000 = Rs 32,00,000.

To make the full Rs 80 lakh exempt, Dilip would need a new house costing at least Rs 1 crore (the full net consideration).

Section 54EC: Bond Route Up to Rs 50 Lakh

Section 54EC is the bond-based exemption for capital gains on the sale of land or building.

Agricultural land has a provision of its own, covered in our guide to the Section 54B capital gains exemption on sale of agricultural land.

Conditions:

• The asset sold is land or building (or both) and is long-term.
• The capital gain is invested in eligible bonds within 6 months of the sale.
• Eligible bonds: National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC) and Indian Railway Finance Corporation (IRFC).
• The bonds have a 5-year lock-in. If transferred before 5 years (or used as security), the exemption is reversed.
• The cap is Rs 50,00,000 per financial year, and Rs 50,00,000 combined across the year of sale and the next financial year.

How much is exempt:

The amount invested in 54EC bonds is exempt, up to the cap.

Worked Example

Sundar sold a plot of land on 10 January 2026 with a long-term capital gain of Rs 75,00,000.

He has 6 months (by 9 July 2026) to invest in 54EC bonds. He invests:

• Rs 30,00,000 on 15 March 2026 (in FY 2025-26).
• Rs 20,00,000 on 1 April 2026 (in FY 2026-27).

Total invested: Rs 50,00,000. The combined cap across the two years is Rs 50,00,000.

So Rs 50,00,000 of the gain is exempt under Section 54EC. The remaining Rs 25,00,000 is taxable as LTCG, unless he reinvests it under Section 54F (if eligible).

Combining the Sections

You can combine 54 (or 54F) with 54EC for the same sale, as long as the same gain is not double-counted.

Example

Sale of land. Gain: Rs 2 crore.

• Buy a new house for Rs 1.5 crore: Section 54F exemption of (1.5 crore / 2 crore) x 2 crore = Rs 1.5 crore. (Assuming net consideration is Rs 2 crore for simplicity.)
• Invest Rs 50 lakh in 54EC bonds within 6 months: another Rs 50 lakh exempt.

Total exempt: Rs 2 crore. Taxable LTCG: zero.

This combination is the standard play for large land sales. The key is sequencing: lock the 54EC investment within 6 months, then track the property purchase or construction within 2 or 3 years.

If the land being sold is agricultural, the rules change: rural agricultural land is tax-free and urban agricultural land has its own Section 54B route, both covered in our guide to capital gains tax on selling agricultural land.

The Capital Gains Account Scheme (CGAS)

If you cannot find or close on the new house by the ITR filing due date under Section 139(1) for the year of sale (31 July, 31 August for non-audit business or professional income, or 31 October if audited), you must deposit the unutilised capital gain amount in a Capital Gains Account Scheme account at any authorised public sector bank (SBI, BoB, etc.) before the due date. Without this, the exemption is denied even if you eventually buy the house within the 2/3-year window.

How CGAS works:

• Open a CGAS account at a notified bank. Two types: Type A (savings, lower interest, withdrawable any time) and Type B (term deposit, higher interest, locked).
• Deposit the unutilised gain in the account before the ITR due date.
• Use the deposit to fund the purchase or construction of the new house within the 2/3-year window.
• Withdraw funds for the purchase or construction using Form C for the first withdrawal and Form D for later withdrawals, with supporting documents.
• If the deposit is not used within the time limit, the unutilised amount becomes taxable as LTCG in the year in which 3 years from the date of sale expire. The balance can then be withdrawn with the Assessing Officer's approval.

CGAS is a procedural step, not a substantive exemption. Skipping it is the most common reason exemptions are denied at scrutiny.

Lock-In on the New Asset

• Section 54 / 54F: The new residential house must not be transferred for 3 years from the date of acquisition or construction. If transferred earlier, under Section 54 the exempted gain is deducted from the cost of the new house when computing the gain on its sale, and under Section 54F the exempted gain is taxed as long-term capital gain in the year of transfer.
• Section 54EC: Bonds must be held for 5 years. Early transfer or use as security for a loan triggers reversal of exemption.

How the Exemption Is Reported in ITR

• Section 54, 54F and 54EC claims are reported in Schedule CG of ITR 2 (or ITR 3 for business income filers).
• You enter the date of new asset acquisition or bond investment, the amount, and reference the relevant section.
• If you used CGAS, the deposit details are also entered.
• Documentation to keep: sale deed of the original asset, purchase deed of the new house (or bond allotment letter), CGAS passbook, bank statements showing fund movement.

Common Errors

• Treating sale value as gain. Only the long-term capital gain is eligible for Section 54 reinvestment; not the entire sale value. Section 54F is the opposite: the net consideration is what must be reinvested.
• Missing the CGAS deadline. If the new house is not bought before the ITR due date, the CGAS deposit must be made by then.
• Section 54EC bond limit confusion. The Rs 50 lakh cap is across the two financial years combined for the same sale, not separately each year.
• Owning more than one house at the time of Section 54F sale. This disqualifies the exemption entirely.
• Treating 54EC bonds as transferable. Early transfer or pledging undoes the exemption.

Where Tax Garden Helps

Reporting a capital gains exemption correctly on your return keeps the claim from being disallowed at processing. Tax Garden's tax compliance services cover the filing side: we file your return and claim the exemption for the reinvestment route you have used, record the CGAS deposit and dates you provide, and file the ITR with full Schedule CG entries.

For background on the LTCG rate and indexation rules, see our capital gains tax guide for AY 2026-27.

Frequently Asked Questions

Can I claim Section 54 if I buy the new house in my spouse's name?

The law requires the new house to be purchased by the assessee. Several High Courts have allowed the exemption where the house was bought in the spouse's name using the seller's own sale proceeds, but the department often disputes such claims. The safest course is to buy the new house in your own name or jointly with your spouse, with the funds traceable to the sale.

Does Section 54EC apply to gains on shares, gold or mutual funds?

No. Section 54EC applies only to long-term capital gains from transfer of land or building or both. Gains on shares, gold, jewellery or mutual funds do not qualify for the bond route. For such assets, the available reinvestment exemption is Section 54F, which requires investing the net sale consideration in a residential house in India, subject to the conditions on existing house ownership.

Can I use home loan money to buy the new house and still claim Section 54?

Yes. The exemption depends on investing an amount equal to the capital gain in a new residential house within the time limits, not on using the exact sale proceeds. Courts have generally accepted purchases financed partly by a home loan. Keep the purchase deed, loan sanction letter and payment trail, because the date of purchase or completion of construction is what the department checks.

What happens if I do not use my Capital Gains Account Scheme deposit within the time limit?

If the amount deposited in the Capital Gains Account Scheme is not used to buy or construct a house within 2 or 3 years from the date of sale, the unused portion is taxed as long-term capital gain in the year in which the 3-year period from the date of sale expires. You can then withdraw it from the bank with approval from the assessing officer.

Is there a limit on the capital gains exemption under Sections 54 and 54F?

Yes. From AY 2024-25, the cost of the new house considered for exemption under Section 54 or Section 54F is capped at Rs 10 crore. Any investment above Rs 10 crore does not increase the exemption. Separately, Section 54EC bond investment is capped at Rs 50 lakh across the year of sale and the following financial year combined.

Sources

This guide is verified against Sections 54, 54F, 54EC of the Income Tax Act 1961, the Finance Acts 2023 and 2024 amendments (Rs 10 crore cap on Section 54/54F, removal of indexation on certain assets), and the Capital Gains Account Scheme Rules 1988. Confirmatory practitioner coverage from ClearTax, IndiaFilings, BankBazaar, Tax2Win and TaxGuru articles was reviewed. Always validate the specific dates and figures against the sale deed, bond allotment letters and your bank's CGAS passbook before filing.