Section 54

Eligibility:

• Only individuals and HUFs who sell a long-term residential property (held for more than 24 months) can claim this exemption.

• The reinvestment must be in a residential house property in India.

• Purchase: Within 1 year before or 2 years after the sale.

• Construction: Within 3 years after the sale.

• The exemption is the lower of the capital gain or the amount invested in the new property.

• As per Budget 2023, there is a ₹10 crore cap on the exemption, effective from 2025.

• Once in a lifetime, a taxpayer can claim this exemption for two properties if the gains are ₹2 crore or less.

Example

• Suppose you sell a property in 2025, realizing a long-term capital gain of ₹50,00,000.

• You invest ₹25,00,000 in a new residential property.

• The exemption will be ₹25,00,000, and the remaining ₹25,00,000 will be taxable as long-term capital gains.

If you invest ₹12,00,00,000 (beyond the ₹10 crore cap), the exemption is capped at ₹10,00,00,000 (as per Budget 2023 changes).

Key Components

• Eligible Taxpayers: Only individuals and HUFs selling long-term residential property.

• Eligible Assets: Sale of long-term residential property (held for more than 24 months).

• Investment Asset: New residential property in India.

• Time Frame:

  • Purchase: 1 year before or 2 years after the sale.

  • Construction: 3 years after the sale.

• Exemption Limit: The lower of the capital gain or the amount reinvested, with a cap of ₹10 crore.

• Special Rule: Two properties can be claimed once if the gains are ≤ ₹2 crore.

• Holding Period: The new property must be held for at least 3 years to maintain the exemption.

Benefits

• Reduces Tax Liability: Offers significant tax savings on long-term capital gains.

• Encourages Housing Investment: Promotes reinvestment in the housing sector, helping to increase homeownership.

• Flexible Options: Allows for either purchase or construction of a new property and permits investment in two properties once for smaller gains.

Challenges

• Strict Timelines: If the reinvestment window is missed or the funds aren’t deposited in the Capital Gains Account Scheme (CGAS), the exemption is forfeited.

• Reversal Risk: If the newly purchased property is sold within 3 years, the exemption is withdrawn, and the tax is applied retroactively.

• Exemption Cap: The ₹10 crore cap limits the benefit for high-value transactions.

• Complex Compliance: Documentation, joint ownership, and partial investments can complicate the claim process.

Conclusion

Section 54 is a powerful tax-saving tool for individuals and HUFs selling a long-term residential property. It incentivizes reinvestment in housing and provides a significant reduction in long-term capital gains tax. However, strict timelines, caps on the exemption, and complex documentation requirements make it crucial to plan and comply carefully.