How Homeowners Can Save Tax on Property Sales Using Sections 54 and 54F?

Selling a residential property or land in India often results in long-term capital gains (LTCG), which are subject to tax. However, the Income Tax Act provides significant relief through Sections 54 and 54F, enabling individuals and Hindu Undivided Families (HUFs) to lower or even completely avoid tax liability by reinvesting the gains into residential property.

Section 54: Relief on Sale of a House Property

Section 54 applies when a taxpayer sells a long-term residential house property. To qualify:

• The property must have been held for at least 24 months before sale.
• The capital gains must be reinvested in a new residential property located in India.
• The investment should be made within one year before or two years after the sale (or within three years if constructing a new house).

A taxpayer can claim this exemption for one residential house. In special cases, if capital gains do not exceed ₹2 crore, exemption may be claimed for two properties — but this option is available only once in a lifetime.

The maximum exemption under Section 54 is the lesser of:

1. Actual capital gains,
2. ₹10 crore, or
3. The sum invested in the new property and deposited in the Capital Gains Account Scheme (CAGS).

If the reinvestment is not made within the stipulated time, the unutilised amount in the CAGS becomes taxable. Additionally, if the new house is sold within three years, the earlier exemption is revoked.

Section 54F: Relief on Sale of Land or Other Assets

Section 54F covers the sale of long-term assets other than residential property, such as land. To qualify:

• The net sale consideration must be invested in one residential house in India.
• The reinvestment window is the same as Section 54: one year before or two years after the sale (or three years if constructing).
• The exemption applies only if the seller does not own more than one other residential property at the time of sale.

The exemption is proportional and calculated as:

Exemption=Investment in new houseNet sale consideration×Capital GainsExemption=Net sale considerationInvestment in new house​×Capital Gains

For instance, if an asset worth ₹50 lakh is sold with ₹10 lakh as capital gain, and ₹40 lakh is reinvested in a house, the exemption would be ₹8 lakh.

Key Caveats

• Funds not reinvested by the income tax filing due date must be parked in a CAGS account with an authorised bank.
• If reinvestment is not completed within the allowed period, the amount becomes taxable.
• Selling the newly purchased or constructed property within three years triggers withdrawal of the exemption.

Why It Matters

With real estate values often running into crores, proper tax planning can lead to substantial savings. By strategically using Sections 54 and 54F, taxpayers can significantly reduce or even eliminate their capital gains tax liability, making property reinvestment a smart financial decision.

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