When you sell shares, mutual funds or other capital assets, you can claim exemption from capital gains tax by reinvesting the sale amount in a residential property. This is allowed under Section 86 of the Income Tax Act 2025 (erstwhile Section 54F under Income Tax Act 1961).
In Mumbai, Rajesh Saluja did exactly this—he bought a ₹13.90 crore house after selling some shares worth ₹15.4 crore. He then spent another ₹1.52 crore from the share-sale proceeds on renovation and architect fees and included these expenses while claiming capital gains tax relief.
The tax department allowed exemption on the amount that went towards buying the house, but rejected the amount spent on renovations, arguing that spending on a house after buying it did not qualify.
However, the Mumbai Income Tax Appellate Tribunal (ITAT) this year ruled in his favour, allowing the disputed expenditure under Section 86.
What happened
On 16 December 2016, Saluja sold shares for about ₹15.40 crore. To claim exemption under Section 86 (then Section 54F), five days later he purchased a residential property for ₹13.90 crore using the sale proceeds from the shares, and deposited the rest in the Capital Gains Account Scheme (CGAS).
After buying the house, he used another ₹1.50 crore from the CGAS on flooring, walls, painting, tiles, bathroom and allied work, plus ₹2 lakh on architect fees. He added these expenses to the total claim amount of ₹15.42 crore.
Before Saluja bought the property, it was rented out. He argued that continuous tenancy had left it in poor condition, making the repairs unavoidable. He submitted supporting documents, including his Capital Gains Account Scheme passbook, showing expenditure within two years of selling the shares.
The assessing officer (AO) rejected the ₹1.52 crore claim out of the total ₹15.42 crore, arguing that a previously rented flat was already liveable. While the first appellate authority upheld the rejection, the Mumbai tribunal rejected the reasoning on two grounds.
Tribunal’s view
First, Section 86 (erstwhile Section 54F) talks about the cost of the new house and sets deadlines for investing. It does not prohibit using the sale amount after purchase to renovate the house within the time limit prescribed under the Section.
Second, the tribunal also rejected the assumption that previous occupation made further work unnecessary. What makes a house suitable for living varies with the buyer’s requirements and convenience, it observed. Civil and electrical work, carpentry, painting, flooring, tiles, lights, fans and partitions could not simply be classified as luxury spending.
“The ITAT has also relied on previous similar judgements of Nayan Kirit Parikh v. ACIT and G. Siva Rama Krishna v. DCIT, which allowed similar expenditure under Section 54F. There are other judicial precedents too that have allowed exemption on similar expenditures under Section 54 too,” said Bhawna Kakkar, chartered accountant and founder of Kakkar & Company, Chartered Accountants.
Section 54, or Section 82 under the New Income Tax Act, 2025, allows exemption on capital gains made on selling a house property if the gains are reinvested in another residential property.
What the law says
This case shows that the Section 86 and Section 82 exemptions can be claimed on the amount spent on expenses other than just the purchase cost. Both allow purchase within one year before or two years after the sale of the asset, or construction within three years afterwards. There are other key conditions too.
Under Section 86 (54F), the taxpayer should not own more than one house property at the time of selling the assets to qualify. Section 82 (54) does not have any such restriction.
Starting 2024, there is also a ₹10 crore ceiling on the cost of the new house that can be counted for these exemptions. If a buyer spends ₹12 crore on the purchase and qualifying renovation work, only ₹10 crore will be considered when calculating the tax relief. Saluja made the claim before 2024, so he could claim the entire sale amount.
More importantly, under Section 86, the full sale amount, and not just capital gains, is to be reinvested. If the full sale amount is not reinvested, exemption on capital gains is calculated in proportion to the sale amount reinvested.
As long as these conditions are met, laws do not restrict claiming any expenditures towards purchase of new house property.
“Even stamp duty and registration amount are counted towards the cost of the new residential property for claiming the exemption,” said Kakkar.
As these rulings explain, qualifying cost is not confined to the bare purchase price.