Capital Gains Tax Planning under Section 54 and 54F – Law, Logic & Exemption Blueprint for AY 2025–26

By CA Sandeep Ahuja

When a capital asset is sold—be it a house or land—the Income Tax Act offers relief from capital gains tax if the sale proceeds or capital gain is reinvested in a residential house under certain sections.

Section 54 and Section 54F are the two key exemption provisions. While both aim to promote reinvestment in housing, they differ in terms of:

• Nature of asset sold

• Base for exemption: indexed capital gain vs. net sale consideration

• Ownership conditions

• Proportionate vs. full exemption computation

This post explains the precise legal position, recent changes, and step-by-step logic for claiming exemption under each section.

Section 45, Section 48 – The Capital Gain Framework

Capital gains arise from Section 45, and their computation is governed by Section 48. Where the asset is held for more than 24 months (in case of immovable property), it qualifies as a long-term capital asset, and indexation benefits are available under Section 48.

Key Point: Exemption under Sections 54 and 54F applies to long-term capital gains only.

Section 54 – Exemption on Sale of Residential House

Applicability

• Assessee must be an Individual or HUF

• Asset sold: A long-term residential house property

• Reinvestment: In one residential house in India

Time Limits

• Purchase: 1 year before or 2 years after sale

• Construction: Within 3 years from sale

Exemption Base

Exemption is allowed only to the extent of the indexed long-term capital gain.

Law Language (Section 54(1)):

"... the capital gain shall not be charged to income-tax to the extent it is so invested in the new asset..."

➡️ This “capital gain” refers to the amount computed u/s 48, i.e., after indexation.

Section 54F – Exemption on Sale of Other Long-Term Assets

✅ Applicability

• Assessee must be an Individual or HUF

• Asset sold: Any other long-term capital asset (e.g. land, gold, shares, commercial property)

• Reinvestment: In one residential house in India

❌ Additional Ownership Condition

• On the date of transfer, the assessee must not own more than one residential house (excluding the new one)

Exemption Base

Exemption is proportionate to the amount of net sale consideration reinvested.

Law Language (Section 54F(1)):

"the capital gain shall not be charged to income-tax in the proportion that the amount invested bears to the net consideration"

➡️ You must invest entire net consideration for full exemption; else only partial relief applies.

Illustration – Section 54 vs Section 54F

Particulars	Section 54	Section 54F
Sale Value	₹2.5 Cr	₹2.5 Cr
Indexed Cost	₹1.9 Cr	₹1.9 Cr
Indexed LTCG	₹60 Lakhs	₹60 Lakhs
Amount Reinvested in House	₹60 Lakhs	₹60 Lakhs
Exemption	₹60 Lakhs (Full)	₹60L × ₹60L/₹2.5Cr = ₹14.4L
Taxable LTCG	Nil	₹45.6 Lakhs

Capital Gains Account Scheme (CGAS)

If the capital gain or consideration is not reinvested before the due date of ITR filing (usually 31 July 2025 for AY 2025–26), the unutilized portion must be deposited into a Capital Gains Account Scheme.

Failure to invest or deposit on time results in forfeiture of exemption.

Recent Amendments & Effective Dates

Budget Year	Change	Effective From
2014	Reinvestment must be in India only	AY 2015–16
2019	One-time benefit to invest in 2 houses under Section 54 if LTCG ≤ ₹2 crore	AY 2020–21
2023–24	No change in exemption computation; indexed gain remains base	AY 2025–26 applicable

Judicial Precedents & CBDT Clarifications

• CBDT Circular No. 667 (1993): Exemption u/s 54 applies to “capital gain” computed after indexation.

• ACIT v. Dr. P.S. Pasricha (ITAT Mumbai): Reinvestment of sale price beyond LTCG does not increase exemption.

• Vinod Kumar Jain v. CIT (344 ITR 501): Section 54F exemption is proportionate to investment in net consideration.

• ITO v. Saraswati Ramanathan (ITAT Chennai): Only indexed capital gain eligible under Section 54.

Visual Decision Tree

(See Image: “Which Section Applies – 54 or 54F?”)

The infographic clearly shows:

• Start with type of asset sold

• Branch into Section 54 or Section 54F

• Apply indexed capital gain or net sale consideration

• Determine if full or proportionate exemption applies

✅ This removes all confusion and ensures lawful claims.

Tax Planning Tips (For AY 2025–26)

•  Use indexed LTCG computation via Cost Inflation Index (CII for FY 2024–25 is 363)

•  Plan reinvestment in stages—land + construction both eligible

•  If timing is uncertain, open CGAS before return filing

•  Claim under Section 54EC (NHAI/REC bonds up to ₹50L) if real estate reinvestment is not viable

•  Avoid owning >1 house if targeting Section 54F

FAQs

Q1: I sold a house for ₹2.5 Cr. Indexed LTCG is ₹60L. How much should I reinvest for full exemption u/s 54?

✅ Answer: ₹60L — only the indexed LTCG. Not full sale price.

Q2: I sold a plot of land. Can I claim Section 54 exemption?

❌ Answer: No. Land is not a residential house. You must use Section 54F if conditions are met.

Q3: Under Section 54F, what happens if I reinvest ₹60L out of ₹2.5 Cr consideration?

Answer: You’ll get partial exemption:
₹60L ÷ ₹2.5 Cr = 24% → Exemption = 24% of LTCG

Q4: Can I invest in two houses under Section 54?

✅ Answer: Yes, only once in lifetime, and only if LTCG ≤ ₹2 Cr.

Q5: Is reinvestment outside India valid?

❌ Answer: No. Post AY 2015–16, only Indian residential properties qualify.

Conclusion: Stay Legally Aligned

Section	Asset Sold	Exemption Base	Reinvestment Requirement	Exemption Type
54	Residential House	Indexed LTCG	New residential house in India	Full or partial
54F	Any other LTCG asset	Net Sale Consideration	Same	Full or proportionate

 Incorrect base (e.g., using full sale price under Section 54) can cause denial of exemption and lead to full tax liability.