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Save capital gains tax on a property sale: Section 54, 54EC and 54F worked examples
How sellers in India reduce tax on a long-term property gain by buying another house (Section 54), investing in 54EC bonds or using 54F, with time limits, caps, lock-ins and worked numbers.
A long-term gain from selling a residential house in India can be fully or partly exempt if you reinvest it. Section 54 covers buying another house within one year before or two years after the sale, or building one within three years, with the exemption capped at ₹10 crore. Section 54EC covers putting up to ₹50 lakh into specified bonds within six months, locked in for five years. If you have not reinvested by your return due date, deposit the money in the Capital Gains Account Scheme to keep the exemption open. Sales of plots and commercial property use Section 54F, which requires the whole net sale price, not just the gain, to go into a house.
The Income-tax Act, 2025 renumbered these exemptions from 1 April 2026. The conditions described here carried over, and this guide uses the familiar names. Check the section labels in the return utility for the year of sale.
The three exemptions side by side
| Section 54 | Section 54EC | Section 54F | |
|---|---|---|---|
| Asset sold | Residential house (long-term) | Any land or building (long-term) | Any long-term asset other than a residential house, such as a plot or shop |
| Invest in | One residential house in India (two, once in a lifetime, if gain ≤ ₹2 crore) | Specified bonds: NHAI, REC, PFC, IRFC | One residential house in India |
| Amount to invest | The capital gain | The capital gain, up to ₹50 lakh across the year of sale and the next year | The net sale consideration; partial investment gives a proportional exemption |
| Time limit | Buy 1 year before or 2 years after; construct within 3 years | Within 6 months of sale | Same as Section 54 |
| Cap | ₹10 crore of exemption | ₹50 lakh of investment | ₹10 crore of investment counted |
| Lock-in | Sell the new house within 3 years and the exemption is reversed | 5 years; no loan against bonds | 3 years; extra conditions on buying another house |
| Other conditions | – | Interest is taxable | You must not own more than one house, other than the new one, on the date of sale |
Who may claim: individuals and HUFs for Sections 54 and 54F. Section 54EC is open to all taxpayers.
Worked example 1: selling one flat, buying a bigger one
Illustrative long-term gain of ₹40,00,000 from selling a flat, after brokerage and the cost of acquisition.
- New flat bought for ₹1,10,00,000 within two years of the sale.
- The investment exceeds the gain, so the entire ₹40 lakh is exempt under Section 54.
- If the new flat cost only ₹30,00,000, ₹30 lakh would be exempt and ₹10 lakh taxable. At 12.5% + 4% cess that is ₹1,30,000.
The new flat's purchase price, including the stamp duty and registration you pay on it, counts as the investment. A home loan used to buy the new flat does not reduce the exemption. What matters is that you invested in the house within time, not where the money came from.
Worked example 2: house plus bonds
Illustrative gain of ₹75,00,000. You buy a new flat for ₹45,00,000 and put ₹30,00,000 into 54EC bonds within six months.
- Section 54 exemption: ₹45,00,000
- Section 54EC exemption: ₹30,00,000
- Taxable gain: nil
Make sure the six-month window for the bonds runs from the date of transfer, usually the date of the registered sale deed, not from the end of the financial year.
Worked example 3: selling a plot under Section 54F
Illustrative sale of a plot for ₹80,00,000 (net of brokerage). Cost ₹30,00,000. Long-term gain ₹50,00,000. You invest ₹60,00,000 in a new house.
- Exempt portion = gain × invested ÷ net consideration = ₹50,00,000 × 60 ÷ 80 = ₹37,50,000
- Taxable gain = ₹12,50,000, and tax at 12.5% + 4% cess = ₹1,62,500
Had you invested the full ₹80 lakh, the whole gain would be exempt.
The Capital Gains Account Scheme
If the return due date for the year of sale arrives and you have not yet bought or built the house:
- Deposit the unspent amount in a Capital Gains Account (Savings for staggered use, or Term) at an authorised bank branch, before the return due date.
- Claim the exemption in your return on the basis of the deposit.
- Withdraw only to buy or build the house within the time limit, using the scheme's forms.
- If any amount is unused when the time limit ends, it is taxed as long-term gain in that year.
Many sellers lose the exemption because they keep the money in an ordinary savings account or a fixed deposit past the return date.
Mistakes that cost the exemption
- Buying the new house in a spouse's or child's name alone. Courts have been divided on this. Hold the new house in your name, or jointly with you as an owner.
- Booking an under-construction flat that will not be finished in three years. Construction must be complete within three years of the sale. Builder delays can cost you the exemption, so choose projects close to completion.
- Buying abroad. The new house must be in India.
- Selling the new house within three years. The exemption is withdrawn. For Section 54, the cost of the new house is reduced by the exempted gain when you calculate the tax on that sale.
- Taking a loan against 54EC bonds within five years. This is treated as a conversion, and the exemption is reversed.
- Missing the six-month bond window because the funds were stuck in an escrow account or in TDS.
- Ignoring the ₹10 crore cap on very large gains.
FAQ
Can I claim Section 54 if I bought the new house before selling the old one?
Yes, if you bought it within one year before the date of sale. Keep the purchase deed dates handy.
Does land under the new house count?
For a house you construct, the cost of the land bought with it is generally counted with the construction cost. Buying only a plot and not building within three years will not qualify.
Are 54EC bond returns tax-free?
No. The investment protects the capital gain from tax, but the interest on the bonds is taxable at your slab rate.
Can an NRI use these exemptions?
Yes. A lower deduction certificate helps reduce TDS accordingly. See the NRI seller guide.
Sources
- Income Tax Department — exemption provisions in the Income-tax Act, 2025 and the Capital Gains Accounts Scheme
- Income Tax Department e-filing portal — capital gains schedule in the return
- National Highways Authority of India — issuer of capital gains bonds
- See also capital gains tax on a property sale, the seller's net proceeds example and the total cost of buying a flat
