s.54 — Exemption on sale of a residential house reinvested in a house
An individual or Hindu undivided family that sells a long-term residential house is exempt to the extent the gain is invested in one residential house in India, bought or built within the time allowed.
The words "one residential house in India" apply from assessment year 2015-16; the two-house option for a gain up to two crore rupees from assessment year 2020-21; and the ten crore rupee limits from assessment year 2024-25. The counterpart in the Income-tax Act, 2025 is section 82.
Income-tax Act, 1961
s.54
Income-tax Act, 2025
s.82
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 54(1) of the Income-tax Act, 1961 applies where an individual or a Hindu undivided family has a capital gain on the transfer of a long-term capital asset, being buildings or lands appurtenant thereto and a residential house whose income is chargeable under the head income from house property, and within one year before or two years after the date of transfer purchases, or within three years after that date constructs, one residential house in India. If the gain exceeds the cost of the new asset only the excess is charged; otherwise nothing is charged; and if the new asset is transferred within three years of its purchase or construction, its cost for that later sale is nil or reduced by the exempted gain. The words "one residential house in India" replaced "a residential house" from assessment year 2015-16 by the Finance (No. 2) Act, 2014. The first and second provisos, inserted by the Finance Act, 2019 with effect from 1 April 2020, allow two houses where the gain does not exceed two crore rupees, an option that can be exercised only once. The Finance Act, 2023, with effect from 1 April 2024, ignores the cost of the new asset above ten crore rupees and gains above ten crore rupees for the deposit. Sub-section (2) requires any amount not used by the date of filing the return to be deposited in the Capital Gains Accounts Scheme not later than the due date under section 139(1); the Bombay High Court held the identical condition in section 54F(4) mandatory in Rasiklal M. Parikh (March 2017). An unused deposit is taxed in the year in which three years from the transfer expire. The counterpart in the Income-tax Act, 2025 is section 82, with the exemption in sub-section (1), the deposit in sub-sections (2) and (4), the two-house option in sub-sections (5) and (6) and the ten crore rupee limits in sub-sections (7) and (8).
What the provision does
Exempts the gain on a residential house to the extent it is reinvested in one new residential house in India, bought within one year before or two years after the transfer or built within three years after it, with a deposit scheme for money not yet used and a clawback if the new house is sold within three years. It is not available to a company, firm or society, it does not apply where the asset sold is land, a right or a commercial unit, which section 54F covers, and it does not say whether a flat built by a developer for the assessee is purchased or constructed.
Threshold questions
- Is the assessee an individual or a Hindu undivided family
- Is the asset sold a long-term residential house whose income is chargeable under income from house property, rather than a right in a flat under construction
- What is the date of transfer from which the one, two and three year windows run
- Is the new house purchased, with windows of one year before and two years after, or constructed, with three years after
- Was any amount not invested by the return date deposited in the Capital Gains Accounts Scheme by the due date under section 139(1)
- Is the investment in one house, or in two within the two crore rupee option, and does its cost exceed ten crore rupees
In practice
The recurring disputes.
Whether a redeveloped or builder-allotted flat is purchased or constructed
Circular 471 of 15 October 1986 treated allotment under the Delhi Development Authority's self-financing scheme as construction, and Circular 672 of 16 December 1993 extended that to co-operative societies and other institutions with similar schemes. The Bombay High Court in Hilla J.B. Wadia held that an owner who conveyed her residence to a co-operative society that built flats, and took a flat in the new building with substantial payment, had constructed a house, the material test being domain over the flat and investment in it. The Calcutta High Court in Bharati C. Kothari (March 2000) held that a flat built by a third party for the assessee is construction, and the Ahmedabad Tribunal in Parikh Amitkumar Mahendrabhai (October 2025) applied the circulars to a private builder. The Revenue's authority is the Bombay High Court in Rasiklal M. Parikh (March 2017): a developer's allotment under the Maharashtra Ownership Flats Act is outside the circulars and confers no title until the agreement is registered; special leave was refused on 20 November 2024. A member's registered agreement to which the society is party sits closer to Hilla J.B. Wadia on domain over the flat. The Revenue's answer is the other half of the Hilla test: the Court required investment in the flat, Rasiklal M. Parikh (paragraph 33) distinguished Hilla because the assessee there had made an investment in it, and a member in a developer-led redevelopment pays nothing towards construction unless he buys extra area. The member's reply is that on the exchange view he invests the old flat itself. The point has not been decided for a member.
When the construction label hurts the assessee
If a builder-allotted flat is construction, it has to be constructed after the transfer. The Mumbai Tribunal in Farida A. Dungerpurwala (September 2014) refused the exemption where the flat had been booked and completed before the original house was sold, because only purchase has a window before the transfer, and the Gujarat High Court in Shantaben P. Gandhi (1980) refused it for a house completed before the transfer. The assessee's answer is the Ahmedabad Tribunal in Subhash Sevaram Bhavnani (June 2012): construction begun before the sale but completed within three years after it qualifies, the date of commencement being immaterial. The Gujarat High Court in Ushaben Jayantilal Sodhan (May 2018) took the building use permission date as the completion of construction. A member who sells another house while his redeveloped flat is being built has Bhavnani on his side, subject to the investment question in the dispute above; one who sells after the flat is complete is exposed.
Possession or registration after three years
The Madras High Court in Sardarmal Kothari (June 2008) approved the view that the house need not be completed within the period if the investment is made in time, and the Ahmedabad Tribunal in Sangram J. Patel (October 2021) and Dilipbhai Ambalal Patel (November 2017) refused to penalise an assessee for a builder's delay. Against that, the Surat Tribunal in Asodariya Gordhanbhai Ranchhodbhai HUF (December 2025) and the Rajkot Tribunal in Hiteshbhai Mansukhbhai Bagdai (May 2024) denied the parallel exemption under section 54F where title came by registration long after the period or was never perfected, and the Ahmedabad Tribunal in Parikh Amitkumar insisted on registration even while treating the case as construction. In Gujarat the claim is safest where the agreement is registered and the payments are made within the period; on the recent orders a stalled project with unregistered documents goes against the assessee.
Two flats received for one
Under the older words "a residential house", the Delhi High Court in Gita Duggal (February 2013) held that floors received back in a builder-led redevelopment of the assessee's own house were one residential house, and the Mumbai Tribunal in Madhu B. Khatri (July 2021) allowed the exemption on two flats on different floors received under a redevelopment agreement for assessment year 2013-14. The Delhi High Court in Kamla Ajmera (December 2024) confined Gita Duggal to a house demolished and reconstructed by a builder and refused two non-adjacent flats that had been bought. From assessment year 2015-16 the section says "one residential house in India", and two houses qualify only under the once only option where the gain does not exceed two crore rupees. No decision applies the Gita Duggal reasoning to the current words in a redevelopment.
Whether the member's own new flat is the new asset
On the exchange view the member transfers the old flat, the value of the new flat is the consideration, and the same flat is the investment that shelters the gain: the Mumbai Tribunal so held in Harisarvottam N.R. Lambus (March 2013) and Dilip P. Ahuja (October 2014), and in Anil Dattaram Pitale (March 2025) said that at most the transaction attracts capital gains with section 54 on the new flat. On the continuation view in Rajesh Shamji Furia (July 2026) the old flat is not transferred, so section 54 is not needed for the new flat, but nor is there a fresh acquisition. The choice matters when the member also receives cash, or sells the new flat within three years, which on the exchange view claws back the exemption under clause (i) or (ii).