Save big on tax by using your capital gains to buy a house. Here's all you need to know.

Section 54 applies if you’re selling a residential property. You can claim an exemption on long-term capital gains (LTCG) tax by using the gains to buy another residential property. There is one condition: the new property must be bought less than one year before or two years after the sale, or built within three years of the sale.

Section 54F takes this a step further by allowing a tax exemption on LTCG from any other capital asset including domestic and international shares, equity mutual funds, gold, and commercial property.

However, this section has more stringent qualifiers. First: the full proceeds of the sale should be reinvested, not just the gains. Second, you should not own more than one house at the time of selling the asset.

Importantly, under both section 54 and 54F, the tax exemption is revoked if the new house is sold within three years of its purchase. There are several other nuances as well. For instance, if you are buying the new property under joint ownership, the purchase price for the tax exemption will be limited to your share and not the total cost of the property. The reverse is also true. If you sell an asset held jointly, you can claim an exemption only on your share of the gains.

Mint explains the intricacies of sections 54 and 54F and how they can help you save on tax.

Do gains from debt funds qualify for this exemption?

No, because only long-term capital gains (LTCG) qualify for exemption under Section 54F. “Since the July 2024 budget changes, certain assets such as debt mutual funds, market-linked debentures and unlisted bonds are considered short-term irrespective of holding period. Hence, gains from these are not eligible for 54F exemption," explained Neeraj Agarwala, partner, Nangia & Co LLP.

However, debt funds acquired before 1 April 2023 should qualify for the LTCG deduction, said Parizad Sirwalla, partner and head, global mobility services, KPMG. Debt investments made before 1 April, 2023 and redeemed after three years are considered long-term holdings. However, from 23 July 2024, the holding period for long-term gains was reduced from three years to two. This means debt mutual fund units bought before 1 April 2023 and sold after 23 July 2024 will qualify as long-term holdings.

Can I claim benefits under both sections on a single property purchase?

Yes, this is allowed as long as all qualifying conditions of each section are met. Riaz Thingna, partner, Grant Thornton Bharat, said courts have time and again affirmed that these provisions are not mutually exclusive.

“The key thing to keep in mind is that under Section 54 the exemption will be restricted to the amount of capital gain reinvested, and under 54F it will be proportionate to the net sale value reinvested. And the combined exemption cannot exceed the actual cost of the new property or ₹10 crore, whichever is lower," he added.

For example, say you sold shares worth ₹50 lakh (eligible under Section 54F) and a house with a capital gain of ₹80 lakh (eligible under Section 54). You buy a new house for ₹1 crore using ₹50 lakh from the shares and ₹50 lakh from the house sold. You will get an exemption on ₹50 lakh from the house sale while the remaining ₹30 lakh will be taxed.

Can I get an exemption on an under-construction property that has been delayed by more than three years?

This is a contentious issue, but courts have granted an exemption to the taxpayer when the delay is the builder’s fault, said Neetu Vinayek, partner and tax infrastructure leader, EY India. “However, it’s only allowed in cases of nominal delays or where the entire amount has been invested in a new residential property that has been substantially completed but not yet fit to be occupied. That said, in such cases the taxpayer has to demonstrate that the delay is beyond their control," she said.

Thingna concurred, adding, “In such cases courts have allowed an exemption only when the taxpayer has given a bona fide explanation and proper evidence that the delay was on account of the builder."

I have to pay the builder in installments over two years but have withdrawn my mutual fund holdings at one go. How should I claim an exemption?

In this case, the sum you paid to the builder from your mutual fund sales in the year you sold them is eligible for the exemption, Vinayek said. “The amount left must be deposited in the Capital Gains Account Scheme (CGAS) prior to filing the income tax return," he added.

Say you sold mutual funds worth ₹1 crore in FY26 and used ₹50 lakh from this to pay the first installment to the builder. If the remaining ₹50 lakh is not used by the time you file your FY26 return, you must deposit it in a CGAS account. You can withdraw it later, when the next installment is due. This way you get an exemption on the full ₹1 crore and won't have to pay tax when filing your return.

The CGAS balance must be used for the construction within three years from the date of selling the mutual funds. Any funds remaining in the account at the end of the three years will be taxed.

Can I repay a home loan with the sale proceeds and get an exemption?

Yes, as long as other conditions are met. “The object of beneficial provisions such as sections 54 and 54F of is to help the taxpayer invest in residential property. Hence, courts have held that there is no statutory mandate under Section 54 of the Act requiring the very same sale consideration to be used for acquiring/constructing a new residential house," said Thingna.

In other words, you can use the sale proceeds to pay your outstanding home loan and get an exemption on this amount.

I have bought a house to benefit from these exemptions but I want to gift it to my adult child or spouse. Will the exemptions be revoked?

Both sections 54 and 54F require the new property to be held for three years. If it is sold or transferred within this period, the exemptions are withdrawn.

The tricky part is whether a gift counts as a transfer. While gifts are not taxable as capital gains under the law, there is no specific exclusion for them in Section 54F, said Sirwalla. “Few court rulings have allowed the deduction, subject to certain conditions, but considering the conflicting rulings that are fact-specific, the deduction may be challenged and eventually revoked," she said.

On the other hand, Agarwala noted that under Section 47, even though ownership changes in gifting, it is not treated as a taxable transfer. “A ‘transfer’ generally covers sale, exchange or transfer of possession for consideration. This doesn’t happen in gifting, so gifting the property to relatives should not, in principle, revoke the exemption."

However, this remains a grey area in practice. “Tax authorities have scrutinised such transactions. Tribunals have taken fact-specific views in such matters, considering the intent of transfer," Agarwala added. If you plan to gift such a property within three years, you should be prepared for potential litigation and ensure robust documentation of intent.

I have used ₹40 lakh to buy a plot and plan to use another ₹60 lakh to build a house on it. Will I get exemption on the full ₹1 crore, or only the ₹60 lakh used for construction?

Under both sections 54 and 54F, reinvesting in an empty plot doesn't get you a tax exemption, but constructing a house on it does. “According to tax department circulars and court rulings, the cost of land is considered part of the cost of a residential house, whether it’s purchased or constructed. So if you use the sale proceeds to buy a plot and build a house on it, the total cost of both can be used for claiming the deduction," Sirwalla said.

However, the construction must be completed within three years or the exemption will be revoked, Agarwala added.