PROSPERR.IO

My Sunil sold his flat in Bangalore in October 2025. Made a capital gain of ₹28 lakh. He came worried, convinced he'd pay ₹3.5 lakh tax. I asked one question: "Are you planning to buy another house?"

He was. Property already shortlisted.

"Then you might owe zero," I told him.

He stared at me. "How?"

That opened a conversation about something most people simply don't know the capital gains exemption provisions that let you legally reinvest your gains and skip the tax.

Why Capital Gains Tax Hurts Without Planning

When you sell a long-term asset property held over 24 months, gold, shares, land the profit is called Long-Term Capital Gain (LTCG). From FY 2025-26, most LTCG is taxed at 12.5% without indexation.

On ₹28 lakh gains, that's ₹3.5 lakh walking out of your pocket. But it doesn't have to, if you plan.

The Income Tax Act gives individuals and HUFs several exemption routes. Each has different conditions, time limits, and investment requirements. The trick is knowing which one applies to your situation.

Section 54: Sell a House, Buy a House

Who it's for: Sold a residential property? This one's yours.

What it does: Invest LTCG in purchasing or constructing another residential house in India—gains exempt, fully or proportionately.

Key conditions:

• Only individuals and HUFs
• Sold property held more than 24 months
• New house purchased within 1 year before OR 2 years after sale
• If constructing, complete within 3 years from sale
• From AY 2024-25, exemption capped at ₹10 crore

Partial exemption: Gains ₹28L but invest only ₹18L? Only ₹18L exempt, ₹10L taxable.

Sunil's case: Gains ₹28 lakh, new house ₹45 lakh. House cost exceeds gains. Full ₹28 lakh exempted. Tax = zero.

Bonus rule: Gains ₹2 crore or below? Split reinvestment across two houses but this is once-in-lifetime.

Section 54F: Sold Shares, Gold, or Land? Here's Your Route

Who it's for: Anyone who sold a long-term asset that is NOT a residential house shares, mutual funds, gold, plot, bonds.

What it does: Reinvest the net sale consideration (full sale price minus selling expenses) in a new residential house, and capital gains are exempt.

Key conditions:

• Only individuals and HUFs
• Asset held over 24 months (equity shares/MFs qualify after 12 months)
• New house purchased 1 year before OR 2 years after sale; construction within 3 years
• Must not own more than one residential house at time of sale (excluding new one)
• Exemption capped at ₹10 crore from AY 2024-25

Critical difference from Section 54: Under 54F, you reinvest full net consideration, not just gains. Partial investment = proportionate exemption.

Example: Neha sold land for ₹50 lakh (paid ₹12 lakh originally, gain = ₹38 lakh). Bought flat for ₹50 lakh. Exemption = ₹38L × (₹50L / ₹50L) = Full ₹38 lakh exempt. Zero tax.

If she'd bought for ₹35 lakh: Exemption = ₹38L × (₹35L / ₹50L) = ₹26.6L exempt. Only ₹11.4L taxable.

Section 54EC: Don't Want to Buy Property? Use Bonds

Who it's for: Anyone individuals, HUFs, companies. This one isn't restricted.

What it does: Invest the capital gains in government-specified bonds within 6 months of the sale. Gains become exempt. No property purchase needed.

Eligible bonds (as of 2026):

• NHAI (National Highways Authority of India)
• REC (Rural Electrification Corporation)
• IRFC (Indian Railway Finance Corporation)
• PFC (Power Finance Corporation)

Key conditions:

• Investment must happen within 6 months from date of transfer
• Maximum investment: ₹50 lakh per financial year
• Lock-in period: 5 years (earlier it was 3 years, changed from April 2018)
• Sell or pledge bonds before 5 years? Exemption reversed

Important: Section 54EC only covers immovable property (land or building). If you sold shares or gold, this doesn't help directly.

Example: Prakash sold a plot and made ₹45 lakh LTCG. Doesn't want to buy property. Invested ₹45 lakh in NHAI bonds within 6 months. Full ₹45 lakh exempt. Tax = zero. Bonds locked for 5 years.

Strategy tip: If your gains are ₹80 lakh, you can invest ₹50 lakh in bonds and use Section 54/54F for the remaining ₹30 lakh. Combine sections to maximise savings.

Section 54B: Sold Agricultural Land? Read This

Who it's for: Individuals and HUFs who sold urban agricultural land.

What it does: Reinvest gains in new agricultural land, and gains become exempt.

Key conditions:

• Sold land must have been used for agriculture for at least 2 years—by you, parents, or HUF
• New agricultural land purchased within 2 years of sale
• Unused amount can be deposited in CGAS before filing ITR

Example: Ramesh sold urban agricultural land, made ₹18 lakh LTCG. Farmed it for 4 years. Bought new agricultural land for ₹20 lakh within 18 months. Full ₹18 lakh exempt.

The CGAS Lifeline: When You Can't Buy in Time

ITR deadline approaching but haven't found a property yet? Deposit the capital gains in a CGAS account at any authorized bank before filing ITR. Government treats this as invested.

You still have the full 2 years to purchase or 3 years to construct. Miss the CGAS deposit before filing? Exemption gone.

2025 update: HDFC, ICICI, Axis Bank now authorized not just public sector banks.

Warning: Deposited ₹20 lakh in CGAS but only used ₹15 lakh to buy? Unused ₹5 lakh becomes taxable as LTCG when the window expires.

Comparing All Sections: Quick Reference

Which Section Applies to Your Situation?

Simple guide:

Selling your house? → Section 54 first. Excess gains not invested in property? Section 54EC for the remainder.

Selling shares, gold, or non-agricultural land? → Section 54F if buying a house. Section 54EC for land/building gains you can't reinvest.

Selling agricultural land? → Section 54B if buying agricultural land. Section 54F if buying residential property.

Don't want any property? → Section 54EC. Maximum ₹50 lakh sheltered this way.

Tax Saving Strategy: Combining Sections

The smartest move? Use multiple sections for the same transaction.

Scenario: Riya sold a flat and made ₹65 lakh LTCG. She bought a new house for ₹45 lakh.

• Section 54 covers ₹45 lakh (full reinvestment in new house)
• Remaining ₹20 lakh: Invest in NHAI/REC bonds under Section 54EC
• Total exemption: ₹45 lakh + ₹20 lakh = ₹65 lakh
• Tax: Zero

This combination is perfectly legal and commonly used. Just ensure the bond investment happens within 6 months of the sale.

Common Mistakes That Cost Lakhs

• Missing the 6-month bond deadline: Section 54EC investors forget the strict 6-month rule. Miss by one day, no exemption.
• Not checking house ownership before 54F: Owning two houses when selling shares? Can't claim 54F. Sell one house before the transaction if possible.
• Forgetting CGAS before ITR deadline: Haven't purchased yet? Deposit in CGAS before filing—not after.
• Selling bonds before 5 years: Emergency liquidation at year 4 reverses exemption. Tax plus interest hits hard.
• Counting wrong holding period: Sold at 23 months—short-term. Sold at 25 months—long-term. That two-month gap changes your entire tax picture.

Conclusion

Capital gains tax doesn't have to drain your profits. These exemptions exist to encourage reinvestment—in housing, bonds, agricultural land.

Sunil paid zero on ₹28 lakh gains. Neha paid zero on ₹38 lakh. Riya saved on ₹65 lakh using two sections together. None of them did anything complicated. They just knew which section applied.

Before selling any major asset, ask yourself two things: How long have I held it? Where will I reinvest?

Those two answers will point you to the right exemption. And if you're unsure, ₹5,000 with a CA could save you ₹5 lakh. Easiest trade-off there is.

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Frequently Asked Questions

Q1: I sold my flat and made ₹30 lakh capital gains. Can I claim both Section 54 (by buying a house for ₹20 lakh) and Section 54EC (for the remaining ₹10 lakh)?

Absolutely yes. This is one of the most practical combinations available. Section 54 covers the ₹20 lakh you reinvest in the new house. For the remaining ₹10 lakh that you're not investing in property, put it in NHAI, REC, IRFC, or PFC bonds within 6 months of the sale. That ₹10 lakh becomes exempt under Section 54EC. Together, the full ₹30 lakh gains get exempted. Tax = zero. Just make sure the bond investment happens within 6 months from the sale date—not 6 months from the ITR filing date. That deadline is strict.

Q2: I sold gold worth ₹60 lakh for which I paid ₹15 lakh originally. Capital gain is ₹45 lakh. I want to claim Section 54F but I already own a flat. What happens?

Section 54F has a condition: on the date of sale, you should not own more than one residential house (excluding the new one you're buying). If you own just one flat, you're fine—the new purchase will be your second, but Section 54F allows that. If you already own two or more flats, you can't claim Section 54F regardless of what you invest in. Also remember, Section 54EC doesn't apply to gold sales—it only covers gains from immovable property (land or building). So for gold, if you can't claim 54F, the gains are fully taxable. Planning the ownership situation before the sale is critical.

Q3: I'm constructing a house on a plot I own to claim Section 54 exemption. How do I prove construction expenses to the tax department?

Keep every single payment proof. Bank transfer records, contractor agreements with dates, material purchase bills, architect fees, municipal permits all of it. The department can ask for these during assessment. Ideally, all payments should be through bank—no large cash payments during construction. If you're depositing money in CGAS and then using it for construction, every withdrawal from CGAS should correspond to a construction expense with documentation. Vague receipts or cash expenses without trails get disallowed. The construction must also be completed within 3 years of the sale date, and ideally, get an occupancy certificate or completion certificate to establish the date.

Q4: My capital gain from selling a plot is ₹60 lakh. Can I invest ₹50 lakh in Section 54EC bonds and the remaining ₹10 lakh in a new house under Section 54F in the same year?

Yes, but you need to understand how 54F works. Under Section 54F, the exemption is proportionate based on how much of the net sale consideration you invest in the house—not just the gains. If your plot sold for ₹80 lakh (with ₹20 lakh original cost and ₹60 lakh gains), the net consideration is ₹80 lakh. Investing only ₹10 lakh in a house means very limited 54F exemption (₹60L × ₹10L/₹80L = ₹7.5L). For Section 54EC, invest up to ₹50 lakh in bonds—that portion of gains gets exempt. The combination works but the 54F proportionate calculation means you'd need to invest significantly more in the house to make a meaningful dent. Run the actual numbers with a CA before deciding.

Q5: I heard Section 54GB helps save capital gains by investing in start-ups. Is it still active and who can use it?

Section 54GB allows individual and HUF taxpayers to claim LTCG exemption on the sale of a residential property if they invest the net consideration in equity shares of an eligible start-up. The start-up must use that money to purchase new assets (plant, machinery, etc.). The time limit is before the due date of filing ITR or within 6 months from the sale, whichever is earlier. The asset purchased by the start-up should not be sold within 5 years. This provision was extended and continues to apply. However, it's complex—the start-up must meet specific DPIIT eligibility criteria, and the lock-in requirements are strict. Very few people use this in practice because finding eligible start-ups and ensuring compliance is complicated. Most people stick to Sections 54, 54F, and 54EC which are simpler and more accessible.