s.54F — Exemption on sale of an asset other than a house reinvested in a house
An individual or Hindu undivided family selling a long-term asset other than a residential house is exempt in proportion to the net consideration invested in one residential house, subject to an ownership bar.
The ten crore rupee limits on the cost of the new asset and on the net consideration for the deposit apply from assessment year 2024-25. The counterpart in the Income-tax Act, 2025 is section 86.
Income-tax Act, 1961
s.54F
Income-tax Act, 2025
s.86
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 54F(1) of the Income-tax Act, 1961 applies where an individual or a Hindu undivided family has a capital gain on the transfer of any long-term capital asset, not being a residential house, and within one year before or two years after the transfer purchases, or within three years after it constructs, one residential house in India. If the cost of the new asset is not less than the net consideration the whole gain is exempt; otherwise the exemption is the proportion that the cost bears to the net consideration, which the Explanation defines as the full value of consideration less transfer expenses. The proviso denies the exemption where the assessee owns more than one residential house, other than the new asset, on the date of transfer, or purchases another within one year or constructs another within three years after it, and the income from such house, other than the one owned on the date of transfer, is chargeable under house property. Sub-section (2) withdraws the exemption if another house is purchased within two years or constructed within three, and sub-section (3) if the new asset is transferred within three years, the exempted gain then being taxed as long-term gain of that year. Sub-section (4) requires unused net consideration to be deposited in the Capital Gains Accounts Scheme by the due date under section 139(1), a condition the Bombay High Court held mandatory in Rasiklal M. Parikh (March 2017). The Finance Act, 2023, with effect from 1 April 2024, ignores the cost of the new asset above ten crore rupees and net consideration above ten crore rupees for the deposit. The counterpart in the Income-tax Act, 2025 is section 86, with the exemption in sub-section (1), the ownership bar in sub-section (5), the ten crore rupee limits in sub-sections (8) and (9) and net consideration in sub-section (10).
What the provision does
Exempts the gain on land, a plot, a commercial unit, a tenancy right, development rights or a right in an under-construction flat to the extent the whole net consideration, not just the gain, is put into one residential house within the time allowed. It does not apply to the sale of a residential house, which section 54 covers, it is not available to a company, firm or society, and it is lost if the assessee already owns more than one other house whose income is taxable under house property, or buys or builds another within the periods in sub-section (2).
Threshold questions
- Is the original asset a long-term capital asset that is not a residential house, such as land, a tenancy right or a right in a flat under construction
- On the date of transfer, does the assessee own more than one residential house other than the new asset, and is the income from it chargeable under house property (a flat of his under redevelopment matters only where he also owns at least one other house)
- Has the whole net consideration been invested, or only part, which gives a proportionate exemption
- Is the new house purchased within one year before or two years after the transfer, or constructed within three years after it
- Was the unused net consideration deposited in the Capital Gains Accounts Scheme by the due date under section 139(1)
- Will another house be purchased within two years or constructed within three, or the new house sold within three, which withdraws the exemption
In practice
The recurring disputes.
A flat under redevelopment counted as a house owned
A member who owns another residential house as well as his own flat, and who sells land or a commercial unit while that flat is demolished and being rebuilt, must decide whether the flat counts under the ownership bar: if it does, he owns two houses other than the new asset and the proviso denies the exemption. A member whose only house is the flat under redevelopment is not caught by this limb in any event, because the bar needs more than one. The assessee's authorities hold that an under-construction house is not a residential house owned: the Delhi Tribunal in Mohinder Kumar Jain (August 2017) and the Ahmedabad Tribunal in Aditya Harshvadan Mangaldas (December 2025), the latter because the villas were not in possession for occupation. The Delhi Tribunal in Adarsh Kumar (May 2018) read clause (b) as a separate condition, so allotted flats yielding no house property income could not trip the bar, and the Mumbai Tribunal in Kishore Anand Shetty (February 2026) held the new asset excluded from the count by the words of the proviso. The Revenue will say the member owns his flat, or at least his rights in it, throughout. In Abhijit Avarsekar (August 2018) the argument for a flat under redevelopment was remanded, and in Urmila Uttam Jhavar (May 2024) a revision was upheld only for verification. No order decides the point for a member's demolished flat.
The redeveloped flat completed after the transfer
Clause (a)(iii) of the proviso and sub-section (2) deal with a residential house, other than the new asset, constructed within three years after the transfer. A member who sells another asset and invests the proceeds elsewhere, while his own redeveloped flat is completed within three years of that sale, is exposed: the Revenue will say he has constructed another house, the developer building for him in the sense the circulars give to construction. The member's answers are that the flat is the same asset he held before, on the continuation view in Rajesh Shamji Furia, and that he spent nothing on its construction. He also has a textual answer: clause (b) of the proviso excludes the one residential house owned on the date of transfer of the original asset, and if, as the Revenue says elsewhere, he owned the flat under redevelopment on that date, the completed flat is that house rebuilt, not another house constructed; the Revenue, he will say, cannot treat the same flat both ways; its reply, on the exchange view, is that the completed flat is a new asset acquired for the old one, not the house owned on the date of transfer. Clause (b) is otherwise satisfied even if he occupies the flat himself, since its income is still chargeable under house property, so the risk is not confined to a flat that is let. The Ahmedabad Tribunal in Aditya Mangaldas did not reach the construction limb. No order has yet tested either reading; in the 2025 Act the limbs are section 86(5)(a)(iii), (5)(b) and (6).
Tenancy surrendered for an ownership flat
The Mumbai Tribunal has consistently treated the surrender of a tenancy for an ownership flat as a transfer of a capital asset with the flat as consideration, so that section 54F applies and section 56(2)(x) does not: Vasant Nagorao Barabde (May 2025) and Varun Jaisingh Asher (March 2026, paragraph 9), resting on D.P. Sandu Bros. Chembur, where the Supreme Court held that income falling under one head cannot be taxed under the residuary head. The Revenue's arguments are that a tenancy created within a family shortly before redevelopment is a colourable device, which failed on the documents in Varun Asher, and, as argued in Vasant Barabde, that no exemption had been claimed. Rasiklal M. Parikh shows the other risk: the tenant there lost section 54F because nothing was deposited in the scheme and the flats were booked with a developer whose registered agreement came after three years. The line favours tenants at the Tribunal; no High Court has ruled on it in a redevelopment.
New house in the spouse's name or in joint names
The Delhi High Court held in Ravinder Kumar Arora (September 2011) that a house bought in joint names with the wife entirely out of the assessee's money qualifies in full, the section requiring that the house be purchased by the assessee and not that it be in his name alone, and in Kamal Wahal (January 2013) that a house bought in the wife's sole name qualifies where the whole investment came from the sale proceeds. The Revenue relies on the words requiring the assessee to purchase, and on a contrary Bombay High Court view noticed in Kamal Wahal and known only from that notice. In a redevelopment the problem arises when extra area or a second flat is bought in a relative's name; until there is a jurisdictional ruling, the safer course is to keep the assessee on title.