Section 54, 54F and 54EC: how to claim LTCG exemption on property

Selling a property or a long-term asset in India can trigger a significant LTCG tax bill. But the Income Tax Act gives you three legal routes to reduce or defer that liability — Sections 54, 54F, and 54EC. Each targets a different situation. Getting the conditions wrong means losing the exemption entirely, so the details matter.

This is the practical guide to how each section works, what the conditions are, and where people typically go wrong.

For the overall picture of capital gains tax rates and how gains are calculated, see the capital gains tax India 2026 guide.

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Why exemptions exist — and when they apply

The logic behind these exemptions is reinvestment. The government allows you to defer (or eliminate) LTCG tax if you channel the money back into productive use — typically another house or specified bonds. If you genuinely reinvest, the tax goes away; if you don't hold the new asset for the required period, the exemption is clawed back.

All three sections apply only to long-term capital assets. For property, that means holding the original asset for more than 24 months. For shares, gold, and other assets under Section 54F, the same 24-month rule applies.

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Section 54 — sale of a residential house

Who it applies to: Individuals and HUFs selling a residential house property.

The exemption: LTCG arising from selling a residential house is fully exempt to the extent you reinvest in a new residential house — either by purchasing one or by constructing one.

Conditions

1. Asset sold: Must be a residential house — not commercial property, not land alone.
2. New house: Purchase must happen within 1 year before or 2 years after the date of sale. Construction must be completed within 3 years from the date of sale.
3. Location: The new house must be in India. The 2023-24 Budget removed the option of buying overseas property to claim Section 54 exemption.
4. Ownership cap (from April 2023): Section 54 exemption is capped at ₹10 crore. If your LTCG exceeds ₹10 crore, the exemption applies only up to ₹10 crore; the balance is taxable.
5. One house only: You can reinvest in only one residential house (this was expanded to two houses from FY 2020-21 for gains up to ₹2 crore, available once in a lifetime).
6. Hold the new house: You must not sell the new house within 3 years of purchase or completion. If you do, the exemption is reversed — the previously exempt gain becomes taxable in the year of sale of the new house.

How much is exempt?

The exemption equals the lower of:

• LTCG from the old house, or
• Cost of the new house

If you spend more on the new house than the gain, the entire LTCG is exempt. If you spend less, only the amount actually spent is exempt.

Worked example — Section 54

Old house purchased in FY 2015-16 for ₹40 lakh. Sold in June 2025 for ₹1.2 crore.

LTCG = ₹80 lakh (after indexed cost, assuming grandfathering applies; see the indexation and CII chart guide for the full calculation).

You buy a new house in December 2025 for ₹90 lakh.

Exemption = lower of ₹80L (LTCG) or ₹90L (new house cost) = ₹80 lakh fully exempt.

If you had bought only a ₹50 lakh flat instead, the exemption would be ₹50 lakh and the remaining ₹30 lakh would be taxable at 12.5% or 20% with indexation depending on your choice.

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Section 54F — sale of any long-term asset other than a house

Who it applies to: Individuals and HUFs selling a long-term capital asset that is not a residential house — this covers shares, gold, jewellery, commercial property, debt mutual funds, unlisted shares, and so on.

The exemption: LTCG is exempt proportionally based on how much of the net sale consideration you invest in a new residential house.

Conditions

1. Asset sold: Any long-term capital asset except a residential house.
2. Reinvestment: Must invest net sale consideration (not just the gain) in a residential house. Purchase within 1 year before or 2 years after; construction within 3 years.
3. One existing house: On the date of sale, you must not own more than one residential house (other than the new one being purchased). If you own two or more houses already, the exemption is not available.
4. New house cap (from April 2024): Exemption is capped at ₹10 crore. Cost of the new house above ₹10 crore does not get counted for proportional exemption.
5. Don't buy another house: After claiming the exemption, you must not purchase another residential house within 2 years, and must not construct one within 3 years (other than the house you're already building for this claim).
6. Don't sell the new house within 3 years.

Proportional calculation

Because Section 54F requires reinvesting net sale consideration (not just gains), the formula is:

Exempt gain = LTCG × (Amount invested in new house / Net sale consideration)

If you invest the entire net consideration, the whole gain is exempt. If you invest only part of it, you save proportionally.

Worked example — Section 54F

You sell gold accumulated over 8 years. Net sale consideration: ₹60 lakh. LTCG: ₹35 lakh.

You invest ₹50 lakh in a new residential flat.

Exempt gain = ₹35L × (₹50L / ₹60L) = ₹29.17 lakh exempt

Taxable LTCG = ₹35L − ₹29.17L = ₹5.83 lakh. Tax at 12.5% (or 20% with CII if gold acquired before July 2024) = approximately ₹73,000.

If you had invested the full ₹60 lakh, the entire ₹35 lakh LTCG would be exempt.

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Section 54EC — bonds (no house required)

Who it applies to: Anyone selling a long-term capital asset that is land or building (or both). Not available for shares, gold, or other assets.

The exemption: LTCG is exempt to the extent you invest in specified long-term bonds issued by NHAI (National Highways Authority of India) or REC (Rural Electrification Corporation).

Conditions

1. Asset sold: Must be land, building, or both — long-term (held more than 24 months).
2. Investment window: Bonds must be purchased within 6 months from the date of transfer. This is a hard deadline — courts have held that even one day late disqualifies the claim.
3. Maximum investment: ₹50 lakh per financial year across all 54EC bond purchases. If the sale and 6-month window straddle two financial years, you can invest ₹50 lakh in each year — effectively ₹1 crore maximum.
4. Lock-in: 5 years. You cannot redeem, transfer, or pledge these bonds for 5 years. If you do, the exempted gain becomes taxable in the year of redemption.
5. No house required: This is the major advantage — you don't need to buy a new house. Section 54EC works whether or not you already own property.

Worked example — Section 54EC

You sell a vacant plot (held for 7 years) for ₹1.2 crore with LTCG of ₹50 lakh. You don't want to buy another house.

Invest ₹50 lakh in NHAI bonds within 6 months.

Entire ₹50 lakh LTCG exempt. Tax saved = ₹6.25 lakh (at 12.5% without indexation). Bonds locked in for 5 years at around 5.25% interest (taxable in your hands each year).

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Capital Gain Account Scheme (CGAS) — preserving the exemption window

A critical but often overlooked mechanism: if your ITR filing deadline arrives before you've reinvested (because construction takes time, or you haven't found the right property), you must deposit the uninvested gain amount in a Capital Gains Account Scheme account before filing your return.

CGAS accounts are maintained by designated nationalised and private-sector banks (SBI, PNB, Bank of Baroda, Canara, HDFC, ICICI, and others). There are two types:

• Type A (savings): Works like a regular savings account; flexible withdrawals with bank approval
• Type B (fixed deposit): Fixed-term deposits; slightly higher interest

The CGAS deposit preserves your Section 54/54F exemption — you get to count the deposited amount as "invested" for the purpose of the exemption, even though you haven't yet purchased the property. You then have until the 2-year or 3-year deadline to actually deploy those funds.

If you don't use the CGAS funds within the allowed period, the amount becomes taxable as LTCG in the year the deadline expires.

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Comparing Sections 54, 54F, and 54EC

Feature	Section 54	Section 54F	Section 54EC
Asset sold	Residential house	Any LTCA except house	Land or building
Reinvestment	New residential house	New residential house	NHAI/REC bonds
Max exemption	₹10 crore	₹10 crore	₹50L/year
House ownership condition	No extra condition	Max 1 existing house	None
Lock-in on new asset	3 years	3 years	5 years
Reinvestment deadline	2 yrs (buy) / 3 yrs (build)	2 yrs (buy) / 3 yrs (build)	6 months

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Common mistakes that invalidate the exemption

Missing the purchase timeline. Sections 54 and 54F allow 2 years to buy. The clock starts from the date of transfer — the date the sale deed is registered, not when you receive payment. Keep this date clear.

Counting incomplete construction as "constructed." For Section 54, the construction must be complete within 3 years. An under-construction flat where possession hasn't been handed over may not qualify if the project runs late — get confirmation of possession in writing.

Not depositing unused gains in CGAS before filing the ITR. This is the most common error. If you miss the ITR deadline without depositing in CGAS, you lose the exemption for that portion — even if you buy the house later.

Under Section 54F, forgetting the proportional rule. Many taxpayers assume Section 54F works like Section 54. It doesn't — under 54F you must invest the full net consideration, not just the gain, to get full exemption.

Buying a second house within 2 years. After claiming Section 54F, purchasing any other house (other than the one you already invested in) within 2 years triggers claw-back.

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For the full picture of how exemptions fit within capital gains tax planning, see the capital gains tax India guide and the how to save capital gains tax on property guide.

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This article is for informational purposes only. Consult a chartered accountant for advice specific to your transaction.

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Frequently asked questions

What is Section 54F of the income tax act?

Section 54F allows individuals and HUFs to claim LTCG exemption when they sell a long-term capital asset other than a residential house and reinvest the net sale consideration in a new residential house. The exemption is proportional — if you reinvest the full net proceeds, the full gain is exempt. From April 2024, the maximum exemption is capped at ₹10 crore. You must not own more than one other house on the date of sale.

What is the difference between Section 54 and Section 54F?

Section 54 applies when you sell a residential house and buy another. Section 54F applies when you sell any other long-term asset (shares, gold, land, commercial property) and buy a residential house. The key practical difference is that Section 54F requires you to invest the entire net sale consideration to get full exemption, while Section 54 only requires reinvesting the gain amount. Both have a ₹10 crore cap and require the new house to not be sold within 3 years.

How much can I invest under Section 54EC?

The maximum investment in NHAI or REC bonds under Section 54EC is ₹50 lakh per financial year. If your asset sale and the 6-month investment window straddle two financial years, you can invest ₹50 lakh in each year, for a total potential exemption of ₹1 crore. The bonds carry a 5-year lock-in and interest is taxable as per your slab.

What happens if I don't use CGAS funds within the allowed period?

If you deposited gains in a Capital Gains Account Scheme account but failed to invest in the eligible asset within the 2-year (purchase) or 3-year (construction) window, the unused balance in the CGAS account becomes taxable as LTCG in the financial year in which the time limit expires. You cannot simply leave the money in CGAS indefinitely.

Can I claim both Section 54 and Section 54EC on the same transaction?

No. You cannot claim exemption under both Section 54 and Section 54EC for the same gain. Each section is available independently, but double-dipping on the same gain is not permitted. If the LTCG on your property sale is ₹80 lakh, you could invest ₹50 lakh in bonds (Section 54EC) and reinvest the rest in a house (Section 54) — but each rupee can only be claimed under one section.

Is Section 54 available for under-construction property?

Yes, but with a condition: the construction must be completed within 3 years from the sale date of the original property. If the builder delays and the project is not completed within this window, you lose the exemption on the uninvested portion. To protect yourself, deposit the funds in CGAS and deploy when the project completes — if completion exceeds 3 years, the deposited amount becomes taxable.