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Section 54 of Income Tax Act : Capital Gain Exemption Research Team | Posted On Thursday, February 21,2019, 01:04 PM

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Section 54 of Income Tax Act : Capital Gain Exemption



This is a question many people ask. I have sold my property. Is the entire amount received taxable? The answer is a simple, No. It’s just the profit you earn on selling the property which is taxed. The profit is called capital gains. Capital gains are of two types:

What is Section 54 of Income Tax Act?

If you sell a property and buy another property, you are eligible for a tax exemption under Section 54. There are certain conditions which must be met to avail the benefit of Section 54 of Income Tax Act:

SEE ALSO: How To Reduce Income Tax In India?

Eligibility under Section 54 of the Income Tax Act:

  • You (seller of the property) must be an individual or HUF.
  • The asset must be classified as a long term capital asset.
  • If the asset you sold is a residential house/apartment, the income from such a house must be chargeable as Income from House Property.
  • You (seller) must purchase the residential house, either one year before the date of sale/transfer, or 2 years after the date of sale/transfer.
  • If you (seller) are constructing a house, you enjoy an extended time period. You will have to construct the residential house within 3 years from the date of sale/transfer. The new residential house must be within India. You cannot purchase a residential house abroad and claim this exemption.

The Finance Minister (Interim) Piyush Goyal in the Union Budget 2019, stated that the benefit of the rollover of capital gains under Section 54 of the income tax act, would be increased from an investment in one residential house to two residential houses, for tax payer with capital gains up to Rs 2 Crores. This benefit is only once in a lifetime.

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SEE ALSO: How To Calculate Income Tax For Salaried Person?

Section 54 of Income Tax Act: Capital Gain Exemption

Exemptions under Section 54 of the Income Tax Act:

The exemption under Section 54 of the income tax act for long-term capital gains is the lower of:

  • Amount of capital gains arising on transfer of residential house.
  • Investments made in the purchase or construction of a new residential house property.

Lets under exemptions under Section 54 of the income tax act with a simple example:

  • Ravi sells his apartment (house property) for Rs 50 Lakhs.
  • With the proceeds of the sale, he purchases another apartment for Rs 20 Lakhs.

Let’s compute capital gains:


Amount (Rs)

Capital Gain on transfer of residential house


Less: Investment in residential property


Balance - Capital Gains


Section 54 of the Income Tax Act Property Transfer:

Let’s understand Section 54 of the income tax act with an example:

Mr A sold his residential property in October 2016 and the capital gains are Rs 30 Lakhs.

In December 2016, Mr A purchased a new residential property of Rs 45 Lakhs.

In July 2017, Mr A sold the new residential house property for Rs 60 Lakhs.

Let’s compute the taxable gains for Mr A:

FY 16-17 (Property sold in October 2016):


Amounts (Rs)

Capital Gain on transfer of residential house


Less investment made in the new residential property


Balance - Taxable Capital Gains in FY 2016-17


FY 17-18 (Property sold in July 2017)


Amount (Rs)

Consideration for transfer (Sale Consideration)


Less: Cost of acquisition (Refer table below)


Balance - Taxable Capital Gains in FY 17-18


Cost of acquisition:

Let’s compute cost of acquisition (As the property was sold within 3 years of purchase and Section 54 was claimed).


Amount (Rs)

Cost of acquisition


Less: Capital gains claimed for earlier house property


Cost of the new house (to be considered)


Amount of tax exemption under Section 54B:

Let’s say a farmer wants to sell his agricultural land and with the proceeds, buy another agricultural land. This is where Section 54B comes in.

Conditions for availing Section 54B:

  • The benefits of this Section are only for an individual or HUF.
  • The asset transferred must be agricultural land. (This is a long-term or short-term capital asset).
  • The agricultural land must be used by person/his parents for agricultural purposes only. This must be at least 2 years preceding the date of transfer.
  • The taxpayer must acquire new agricultural land within two years from the date of transfer of the old agricultural land.

Capital Gains Account Scheme:

The Central Government introduced the Capital Gains Account Scheme (CGAS) in 1988. The time limit available for you for re-investment to avail the income tax benefit under Section 54 is longer than the due date to file income tax returns (ITR). This is when Capital Gains Account Scheme comes in.

You can deposit the unutilized capital gains in a Capital Gains Account Scheme. The capital gains invested in CGAS is eligible for capital gains exemption, just like re-investment.

Who can deposit in capital gains account scheme?

If you are unable to invest in a specified investment/property before furnishing ITR, (Do note that the time of investment has not expired), you can deposit the unutilized capital gain in the capital gains account before furnishing ITR, but not beyond ITR filing due date.

How to open capital gains account?

  • You can open capital gains account by making application in duplicate in Form A.
  • You need documents like PAN, Address proof like Driving License, Aadhaar, Passport and a photograph.
  • Deposits can be made in cash, cheque, DD.
  • Deposits would be made in lump sum or installments. 

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