54 Tax Rebate

When you sell a residential property for a profit, you need to pay income tax for income under the head capital gains. In case you have held the property for three years or longer, it becomes long term capital gains. Section 54 of the Income Tax Act gives exemption on this long term capital gains tax liability in case of residential property.

Eligibility for 54 exemption

To qualify under Section 54, you need to be an individual or HUF and must do one of the following:

- Buy another residential property within 2 years or before 1 year of sale of the old residential house

- Construct a residential property within 3 years of sale of the old residential house

This new house should not be sold for a minimum of 3 years (if it is, then capital gains tax benefits get reversed).

If you do not utilize the amount of capital gains for either buying or constructing residential house before due date for filing Income Tax Return for that year the entire capital gain amount or whatever part of it that has not been utilized should be deposited in a Capital Gains Account Scheme (CGAS) with authorized banks.

The amount in CGAS which is utilized for buying or constructing residential house within stipulated time will get long term capital gains tax exemption and any amount left unutilized will be taxable as part of your income at the end of 3 years from the sale of your original residential property.

Selling new residential property within 3 years where entire capital gains had been utilized

If the new residential property bought or constructed is sold within 3 years of sale of original property then the amount of capital gains you made from the original sale will be deducted from the cost of the second property being sold for computing capital gains on the second transaction.

Selling new residential property within 3 years where entire capital gains had not been utilized

If the entire capital gains were not utilized while buying or constructing a new residential house which is also sold within 3 years of the original sale, the unutilized capital gain amount will be charged for income tax in the year of  second sale. Cost of the second house being sold will be 'nil' in this case for computing capital gains.  

Maximum deduction limit under 54

There is no cap on the extent of tax exemption permitted in section 54. The entire capital gains if utilized as specified above can be exempted from income tax.

Fintotal comment

Section 54 works like this:

Suppose you sold a flat in 2012 for Rs 45 lakhs which you had bought in 2000 for Rs 15 lakhs. Your long term capital gains work out to be Rs 30 lakhs (without indexation, for simplicity). If you purchase another flat for Rs 60 lakhs in that same year your LTCG from the sale become nil. You do not have to declare LTCG from sale of house in your Income Tax Return.

The law does not require that the new residential house should be registered in your name. It only requires that you should have purchased/constructed it. Even if the purchase or construction is completed only in part you can still claim tax exemption under section 54.

Similarly if you just purchase share in the house you are residing in, say which is owned by your spouse, this would also qualify for exemption under section 54.


Get the all financial products under one roof only at

you will NEVER GO WRONG with us!

Unbiased . Best Deals . Appropriate Products . No Mis-selling