Income Tax · Capital Gains
54 Of Income Tax Act (India, 2026)
Sell a house you have owned for years and the profit can be large, and so can the tax on it. Section 54 of the Income-tax Act is the relief that lets you avoid that long-term capital gains tax if you put the gain back into another home. This guide explains who can use section 54, what you must buy or build, the time limits that trap most people, and what to do if you have not reinvested by the time you file.
- What it saves: long-term capital gains tax on the sale of a residential house.
- Who: an individual or HUF, not a company or firm.
- What to reinvest: the capital gain into one residential house in India (two houses allowed once, if the gain is up to Rs 2 crore).
- Time limits: buy 1 year before or 2 years after, or construct within 3 years of the sale.
- If not yet used: deposit the unused gain in a Capital Gains Account before the ITR due date.
- Lock-in: do not sell the new house within 3 years, or the exemption is reversed.
01What section 54 actually does
Section 54 gives an exemption from long-term capital gains tax when you sell a residential house and reinvest the gain in another residential house in India. If you meet every condition, the capital gain is not taxed at all, or is taxed only on the part you did not reinvest.
The idea is simple: the law does not want to tax you for moving from one home to another. So if the money from selling one house goes into buying or building another, the gain is allowed to roll over instead of being taxed in the year of sale.
This is an exemption, not a deduction from salary. It reduces the capital gain that would otherwise be added to your income and taxed, usually at 20% with indexation or at the rate notified for the year.
02Who can claim and on what
Section 54 is for an individual or a Hindu Undivided Family (HUF). A company or a firm cannot claim it. The asset you sell must tick these boxes:
- It is a residential house, that is a building or land attached to it that is a house. Selling a plot of bare land or a commercial shop does not qualify under section 54 (that may fall under section 54F or 54EC instead).
- It is a long-term asset, meaning you held it for more than 24 months before selling. A house sold within 24 months gives a short-term gain, which section 54 does not cover.
- The income from it was chargeable under "income from house property", which is the normal case for a home.
What you must buy or build is one residential house in India. From the rules in force in recent years, if your capital gain is up to Rs 2 crore you may reinvest in two houses instead of one, but this choice can be used only once in your lifetime.
03The reinvestment and time limits
The time limits are where most claims go wrong. Count carefully from the date of sale.
| What you do with the gain | Time allowed |
|---|---|
| Buy a ready house | 1 year before the sale, or 2 years after the sale |
| Construct a new house | Within 3 years after the sale |
| Park the money if not yet used | Deposit in a Capital Gains Account before the ITR due date |
Two more points matter:
- A cap on the exemption: the amount you can claim under section 54 is limited, with a ceiling of Rs 10 crore on the cost of the new house that counts for the exemption, as notified in recent years. Gains beyond that are taxed.
- A lock-in on the new house: if you sell the new house within 3 years of buying or building it, the exemption you claimed is reversed and added back to your income.
Section 54 is lost more often on a missed deadline than on anything else. The 2-year purchase window and the 3-year construction window run from the date of sale, not from the date you file.
04The Capital Gains Account Scheme
Here is the practical problem: the due date to file your return usually comes before you have finished buying or building the new house. If you have not spent the gain by then, the law does not make you lose the exemption. You park the unused gain in a Capital Gains Account Scheme (CGAS) account with a notified bank before the ITR due date.
- You open the CGAS account and deposit the unused capital gain before filing your return.
- You then withdraw from it to pay for the new house within the purchase or construction window.
- If any amount in the account is still unused after the window closes, that part becomes taxable in the year the window ends.
Keep every proof: the sale deed, the purchase or construction bills, and the CGAS statements. These are what you will need if the return is examined.
05Section 54 vs section 54F
People often mix up section 54 and section 54F. The difference is what you sold.
| Point | Section 54 | Section 54F |
|---|---|---|
| What you sell | A residential house | Any long-term asset other than a house (land, shares, gold) |
| What you reinvest | Only the capital gain | The net sale consideration (the whole amount) |
| Condition on other houses | No limit on how many houses you already own | You must not own more than one other house |
So if you sold a plot of land or shares and want to buy a house, you are usually looking at section 54F, not section 54. Getting the right section matters because the amount you must reinvest is different.
06How Claw Tax helps
Claw Tax and Accounts is an online tax, GST and accounting service for India that connects you with a verified chartered accountant at a fixed, published price, with a Claw reviewer checking every filing before it is submitted.
A capital gains return with a section 54 claim is something you can file yourself on the income tax portal if you are confident about the dates, the amounts and the CGAS rule. Many people are not, because one wrong date can cost lakhs in tax. Claw Tax is for when you want a verified chartered accountant to compute the gain correctly, apply section 54, and file it so the claim holds up.
You pick a capital gains ITR at a fixed, published price (capital gains filing starts from Rs 2,499, see the page), a verified CA prepares the computation, a Claw reviewer checks it before submission, and you get reminders before the next due date. You can see the fixed prices and start at clawlaw.in/tax. For a comparison of options, see the best ITR capital gains services in India.
This is general information, not tax advice; a verified CA handles the specifics of your case.
07Frequently asked questions
Does section 54 apply to selling a plot of land?
No. Section 54 applies only to the sale of a residential house. If you sell a plot of land, shares, gold or any other long-term asset and reinvest in a house, you are looking at section 54F instead, which has different rules, including that you must reinvest the whole sale amount and must not own more than one other house.
How long do I have to buy the new house?
You can buy a ready house up to 1 year before the sale or within 2 years after it, or construct a new house within 3 years of the sale. These windows run from the date of sale. If you miss them, the exemption is lost and the gain becomes taxable.
What if I have not bought the house by the time I file my return?
Deposit the unused capital gain in a Capital Gains Account Scheme (CGAS) account with a notified bank before the due date for filing your return. You then withdraw from it to pay for the new house within the allowed window. Any amount left unused after the window closes becomes taxable in that later year.
Can I claim section 54 for two houses?
In recent years the law has allowed reinvesting in two houses instead of one if the capital gain is up to Rs 2 crore, and this choice can be used only once in a lifetime. Confirm that this option still applies for the assessment year you are filing, as the conditions can change.
What happens if I sell the new house soon after buying it?
If you sell the new house within 3 years of buying or building it, the capital gains exemption you claimed under section 54 is reversed. The exempted gain is brought back and taxed, and the cost of the new house for its own capital gain is also reduced by the exemption you had claimed.
Will the section number change under the Income-tax Act 2025?
The Income-tax Act, 2025 is set to replace the 1961 Act, and section numbers may be renumbered even where the relief itself continues. Always confirm the exact section and the conditions for the assessment year you are filing before you rely on them.