Section 54 Exemption on House Sale: AY 2026-27

Selling a residential house in FY 2025-26 can create a long-term capital gain (LTCG) tax liability. However, eligible taxpayers can reduce or eliminate this tax by claiming Section 54 exemption on the sale of house property for AY 2026-27. The exemption applies when you reinvest the capital gain in another residential house in India within the prescribed time limit.

For AY 2026-27, the key rules include the ₹10,00,00,000 cap on the Section 54 exemption, the option to invest in two residential houses in limited circumstances, and the requirement to use the Capital Gains Account Scheme (CGAS) when the new house is not purchased or constructed before the income tax return due date.

What is Section 54 exemption for AY 2026-27?

Section 54 of the Income-tax Act, 1961 allows an individual or Hindu Undivided Family (HUF) to claim an exemption against LTCG arising from the sale of a residential house.

You can claim the exemption if you:

• Sell a residential house held as a long-term capital asset.
• Purchase another residential house in India within the specified period, or construct one within three years.
• Invest the eligible amount in the new house or deposit the unutilised amount under CGAS before the income tax return due date.

The exemption is available against long-term capital gains, not against short-term capital gains. The asset sold generally becomes long-term when you hold it for more than 24 months.

The statutory provisions are available in the Income-tax Act on the Income Tax Department website.

Who can claim Section 54?

The benefit is available to:

• Resident or non-resident individuals.
• Hindu Undivided Families.

Companies, firms, limited liability partnerships and other entities cannot generally claim Section 54. They may need to examine other applicable capital gains provisions depending on the asset and transaction.

How to calculate the Section 54 exemption

The exemption is generally the lower of:

1. The amount of LTCG from the sale of the original residential house; or
2. The amount invested in the new residential house.

From AY 2024-25 onwards, the law limits the cost of the new asset considered for Section 54 exemption to ₹10,00,00,000. This limit continues to apply for AY 2026-27.

Therefore, the Section 54 exemption limit of ₹10,00,00,000 from AY 2026-27 is a maximum qualifying investment limit, not a fixed exemption available to every taxpayer.

Example of Section 54 calculation

Assume:

• Sale consideration of old house: ₹2,00,00,000
• Expenses relating to transfer: ₹5,00,000
• Cost and eligible adjustments: ₹85,00,000
• LTCG: ₹1,10,00,000
• Investment in new house: ₹90,00,000

The eligible exemption will be the lower of:

• LTCG: ₹1,10,00,000
• Investment in new house: ₹90,00,000

Therefore:

• Section 54 exemption: ₹90,00,000
• Taxable LTCG: ₹20,00,000

If the taxpayer invests ₹1,50,00,000 in the new house, the exemption will generally be restricted to the LTCG of ₹1,10,00,000. If the investment is ₹12,00,00,000, only up to ₹10,00,00,000 can be considered because of the statutory cap.

Section 54 time limit for buying or constructing a residential house

The Section 54 time limit for buying or constructing a residential house depends on whether you purchase a ready or under-construction property or construct a house yourself.

Action	Permitted time limit
Purchase a residential house before sale	Within 1 year before the date of transfer
Purchase a residential house after sale	Within 2 years after the date of transfer
Construct a residential house	Within 3 years after the date of transfer

Purchase before selling the old house

You may claim Section 54 if you purchase the new residential house within one year before selling the original house. The relevant date is generally the date of purchase or transfer, depending on the facts and legal documentation.

Purchase after selling the old house

If you buy the new house after the sale, you must complete the purchase within two years from the date of transfer of the original house.

Construction of a new house

For construction, the house must generally be completed within three years from the date of transfer. Keep construction agreements, approved plans, payment records, contractor invoices and completion-related documents to establish that the investment relates to construction.

The new property must be a residential house situated in India. Investment in a house located outside India does not qualify for Section 54 exemption.

Can Section 54 exemption be claimed for two residential houses?

Usually, Section 54 applies when the taxpayer invests in one residential house in India. However, the law permits investment in two residential houses in India in one important situation.

You can claim exemption for investment in two houses if:

• The LTCG does not exceed ₹2,00,00,000; and
• You exercise this option only once during your lifetime.

This provision is commonly referred to as the Section 54 investment in two residential houses condition.

Example

Suppose an individual earns LTCG of ₹1,80,00,000 from the sale of one residential house and invests:

• ₹90,00,000 in House A; and
• ₹90,00,000 in House B.

Since the LTCG does not exceed ₹2,00,00,000, the taxpayer may be able to claim Section 54 exemption for both houses, subject to meeting all other conditions.

The two-house option is not an unlimited annual benefit. Once used, the taxpayer cannot ordinarily use the same option again in a later year.

The combined investment in the two houses also remains subject to the ₹10,00,00,000 ceiling for Section 54 purposes.

Capital Gains Account Scheme deadline and rules

Taxpayers often sell the original property before completing the purchase or construction of the new house. In that case, they can deposit the unutilised capital gain in the Capital Gains Account Scheme, or CGAS.

The Section 54 Capital Gains Account Scheme deadline is the due date for filing the income tax return under Section 139(1) for the relevant assessment year.

For AY 2026-27, the relevant previous year is FY 2025-26. If the new house has not been purchased or constructed by the applicable return filing due date, deposit the unutilised amount in a CGAS account before that due date.

How CGAS works

1. Calculate the LTCG from the sale of the original house.
2. Subtract the amount already invested in the new house.
3. Deposit the balance intended for reinvestment in a CGAS account.
4. Report the deposit in the income tax return for AY 2026-27.
5. Use the funds within the applicable two-year purchase or three-year construction period.

The deposit should be made with an authorised bank under the Capital Gains Account Scheme. The scheme generally provides:

• Type A account: Similar to a savings account and suitable for frequent withdrawals.
• Type B account: Similar to a term deposit and generally suitable where the money will remain invested for a longer period.

The bank may require a prescribed application form, proof of identity, property sale documents and other details. Withdrawals must be used for the permitted purchase or construction. The bank may also require documentation when funds are withdrawn.

The Income Tax Department provides information on capital gains and related compliance through its official capital gains guidance.

What happens if CGAS money remains unused?

If the amount deposited in CGAS is not used:

• Within two years for purchasing the new house; or
• Within three years for constructing the new house,

the unused amount can become taxable as capital gains after the applicable period expires.

The exact tax treatment depends on the statutory conditions, the date of transfer and the amount remaining unutilised. Therefore, maintain a clear record of every withdrawal and payment made towards the new property.

Interest earned on deposits may also have separate tax implications and should be considered while preparing the return.

Important conditions for claiming Section 54

The new property must be residential

Section 54 applies to investment in a residential house. Buying only land does not ordinarily satisfy the condition unless construction of a residential house is completed within the permitted period.

The property must be in India

The new residential house must be located in India. A foreign residential property does not qualify for this exemption.

The investment must be linked to the capital gain

Maintain a proper trail showing that the investment relates to the sale proceeds or capital gain from the original property. Use banking channels and preserve payment records.

The exemption is not automatically available for every house sale

The taxpayer must calculate the LTCG correctly after considering:

• Sale consideration.
• Brokerage and transfer expenses.
• Original cost of acquisition.
• Cost of improvement.
• Applicable indexation or capital gains computation rules.
• Any other legally permitted adjustments.

For property acquired before 23 July 2024, resident individuals and HUFs may need to compare the tax outcome under the applicable 12.5% rate without indexation and the 20% rate with indexation, where the law permits the comparison. The computation should be made carefully before deciding the reinvestment amount.

What if the new house is sold within three years?

Section 54 contains an anti-avoidance condition for an early sale of the new house.

If you sell the new residential house within three years from its purchase or construction, the earlier exemption can effectively be withdrawn through the capital gains computation. The cost of acquisition of the new house is reduced by the Section 54 exemption claimed.

Example

Assume:

• Cost of new house: ₹1,00,00,000
• Section 54 exemption claimed: ₹70,00,000
• Sale of new house within three years

For capital gains computation, the effective cost may be reduced to:

₹1,00,00,000 - ₹70,00,000 = ₹30,00,000

If the house is sold for ₹1,20,00,000, the resulting gain is computed using the reduced cost, subject to the applicable capital gains rules.

This rule prevents taxpayers from claiming an exemption and immediately selling the replacement property without a corresponding tax consequence.

How to claim Section 54 deduction against LTCG in India

Technically, Section 54 provides an exemption, not a deduction from gross total income. You claim it while calculating taxable capital gains in the income tax return.

Follow these steps:

1. Identify the date of transfer of the original residential house.
2. Check the holding period to determine whether the gain is long-term.
3. Calculate the LTCG after eligible transfer expenses and cost adjustments.
4. Check the new house purchase or construction deadline.
5. Calculate the amount eligible for exemption, subject to the LTCG amount and ₹10,00,00,000 cap.
6. Deposit the unutilised amount in CGAS before the Section 139(1) return due date if the new house is not yet purchased or constructed.
7. File the income tax return for AY 2026-27 and report the capital gain, exemption and CGAS deposit details.
8. Keep supporting records for future assessment or verification.

Documents to preserve

Keep the following documents:

• Sale deed of the original property.
• Purchase deed or allotment letter of the new house.
• Stamp duty and registration receipts.
• Brokerage and transfer expense records.
• Construction invoices and contractor payments.
• Bank statements showing payment of the sale proceeds.
• CGAS passbook and deposit certificate, if applicable.
• Proof of withdrawals from CGAS.
• Income tax return acknowledgement.

The new property need not always be purchased directly in the taxpayer’s name in every fact situation, but ownership and funding issues can create disputes. The safest approach is to ensure that the eligible taxpayer is clearly reflected as the purchaser or owner and that the payment trail supports the claim.

Common questions on Section 54 for AY 2026-27

Can I claim Section 54 if I buy a flat from a builder?

Yes, a flat purchased from a builder can qualify if it is a residential house and the purchase falls within the prescribed two-year period. For an under-construction property, examine whether the arrangement is legally treated as a purchase or construction and keep possession and payment records.

Can I claim Section 54 for renovation?

Routine renovation or repairs to an existing house generally do not qualify as the purchase or construction of a new residential house. Construction of a new residential unit may qualify if it meets the statutory conditions.

Can I claim Section 54 for more than one sale?

The exemption is calculated separately for each eligible transfer. However, if you use the special two-house option, remember that it is available only once during your lifetime and requires LTCG of not more than ₹2,00,00,000.

Can I claim Section 54 if I do not file the return on time?

Depositing the unutilised amount in CGAS before the Section 139(1) due date is important where the new house has not yet been purchased or constructed. Filing the return after the due date does not replace the requirement to make the CGAS deposit within the prescribed time.

Is Section 54 available under the new tax regime?

Section 54 is a capital gains exemption linked to reinvestment in a residential house. It is not one of the Chapter VI-A deductions affected by the new tax regime. Eligible taxpayers should report the exemption correctly while computing capital gains in the return.

Final checklist for AY 2026-27

Before claiming Section 54 exemption on the sale of a house property, verify that:

• You are an individual or HUF.
• The original asset is a residential house.
• The gain is long-term.
• The replacement property is a residential house in India.
• Purchase occurred within one year before or two years after the sale, or construction will be completed within three years.
• The eligible investment does not exceed ₹10,00,00,000.
• The two-house option is used only when LTCG does not exceed ₹2,00,00,000 and only once in your lifetime.
• The unutilised amount is deposited in CGAS before the Section 139(1) due date.
• All sale, purchase, construction and banking records are preserved.
• The exemption is correctly reported in the AY 2026-27 income tax return.

The key to claiming of Section 54 deduction against LTCG from sale of house property in AY 26-27 is timely reinvestment, accurate capital gains computation and compliance with the CGAS deadline. Plan the purchase or construction schedule early, track the ₹10,00,00,000 Section 54 exemption limit, and report the exemption correctly in your AY 2026-27 return.