When claiming capital gains tax exemption under Section 54, simply selling a property and buying another is not enough. The Income Tax Act defines specific rules related to timing, property usage, investment limits, and eligibility conditions.
Understanding these rules correctly is essential to claim the exemption without facing tax issues later.
Below are the key Section 54 rules explained step by step.
Rule 1: Timing Requirements
You must purchase or construct a new residential property within the prescribed time limits.
Option A: Buying an Existing Property
You can buy a new residential property:
✅ 1 year before selling the old house, OR
✅ 2 years after selling the old house
Option B: Constructing a New House
If you plan to construct a property:
✅ Construction must be completed within 3 years after selling the old house.
Rule 2: Property Use Requirement
Mandatory Condition
The new investment must be a residential property used for living purposes.
❌ Not allowed:
- Commercial property
- Office space
- Shop
- Warehouse
- Factory
✅ Allowed:
- Residential house
- Apartment
- Villa (for residential use)
Rule 3: Two-House Exemption Benefit
Under specific conditions, taxpayers can invest in two residential properties instead of one.
Eligibility Condition
- Long-term capital gain must be ≤ ₹2 crore
What You Can Do
✅ Invest in two residential houses
✅ Still claim full Section 54 exemption
Critical Restriction
⚠️ This is a one-time benefit and can be used only once in your lifetime.
Rule 4: ₹10 Crore Exemption Cap
Maximum Cost Considered (From AY 2024–25)
The exemption calculation is capped at ₹10 crore.
What This Means
✅ If you spend ₹10 crore or less, the full amount is considered for exemption.
⚠️ If you spend more than ₹10 crore, only ₹10 crore will be counted, and the excess amount is ignored.
Example Scenario
Scenario A
- Old house sold: Capital gain = ₹5 crore
- New house purchased: ₹8 crore
Result:
The full ₹5 crore capital gain is exempt because the new property cost exceeds the gain amount.
Conclusion
Section 54 provides significant tax relief for taxpayers reinvesting capital gains into residential property. However, compliance with timing rules, property usage requirements, exemption limits, and eligibility conditions is essential to successfully claim the benefit.