Section 54F of the Income Tax Act: How to reduce your capital gains tax by buying a house in India

You sold gold, shares, mutual funds, land, commercial property, art, bonds, or any long-term capital asset that is not a residential house. You now have long-term capital gains (LTCG). Section 54F can reduce or remove that LTCG tax if you invest the net sale proceeds into one residential house in India within the allowed time window.

What Section 54F actually does

Section 54F is a tax exemption on LTCG, not on the entire sale amount.

• If you invest 100% of the net consideration into the new house, then 100% of the LTCG can become exempt.
• If you invest only part, then the exemption is proportionate, and the balance LTCG stays taxable.
• Your total eligible investment for the exemption calculation is capped at ₹10 crore (investment in house plus CGAS deposit).

Step 1: Confirm your gain is "long-term"

Section 54F applies only when the original asset sold is a long-term capital asset.

In simple terms (rules vary by asset type):

• Many assets become long-term after more than 24 months of holding (and earlier it could be 36 months for older transfers).
• Listed shares and some listed securities typically become long-term after more than 12 months.

If your asset is short-term, 54F will not apply.

Step 2: Check the core eligibility rules

Who can claim it

Only:

• Individuals
• HUFs

What asset sale qualifies

• Sale of any long-term capital asset other than a residential house.

What you must buy/construct

• One residential house in India.

Time limits

• Purchase the house within 1 year before OR within 2 years after the transfer date, or
• Construct the house within 3 years after the transfer date.

Step 3: The "one house only" rule at the time of sale

54F does not apply if you fail these conditions:

• On the date you sell the original asset, you own more than one residential house other than the new house.
• You buy another residential house (other than the new one) within 1 year after the transfer.
• You construct another residential house (other than the new one) within 3 years after the transfer.

Step 4: Understand “net consideration” (this is where people slip)

Section 54F uses net consideration, not just “capital gains”.

Net consideration = Sale value minus expenses of transfer like brokerage, legal fees, commission, etc.

Step 5: The exemption formula

If you invest the full net consideration, full exemption.
If you invest partially, proportionate exemption.

Exempt LTCG = LTCG × (Investment in new house ÷ Net consideration)

Where “Investment” includes:

• Amount paid for the house, plus
• Amount deposited in CGAS (Capital Gains Account Scheme), if you have not yet used the money.

Investment cap: total investment counted for this formula cannot exceed ₹10 crore.

Illustration with your 2 cases

Inputs and output

Why Case 2 changes: even though ₹12 cr was invested, the exemption calculation considers maximum ₹10 cr investment.

CGAS: What to do if you cannot buy the house before filing taxes

If the net consideration is not yet used for purchase or construction before filing your return, you must deposit the unutilised amount into the Capital Gains Account Scheme (CGAS).

Key rule:

• Deposit before filing the return under section 139, and in any case not later than the due date under section 139(1), then attach proof.

If CGAS money is not used within the allowed timeline:

• The unutilised amount becomes taxable as LTCG in the year when the 3-year period ends (as per the section’s mechanism).

When your 54F exemption can be withdrawn later

Even if you claim 54F correctly, the exemption can get reversed in common situations:

1. You buy or construct another residential house within the restricted timelines (besides the new one).
2. You sell the new house within 3 years, then the earlier exempted gain is pulled back into tax computation.
3. CGAS deposit not used within time, then it becomes taxable in the relevant year.

Checklist before you claim 54F

• Confirm asset sold is LTCG
• Confirm it is not a residential house
• Confirm you are Individual/HUF
• Confirm you do not own more than one house (other than the new one) on sale date
• Invest within timelines, else park funds in CGAS before 139(1) due date
• Track the 3-year lock-in risk and “no extra house” restrictions

FAQs

1. Can I claim 54F if I invest only the “capital gain” and not the full sale amount?

Yes, but then your exemption becomes proportionate because the formula compares your investment to the net consideration.

2. Can I buy the house before selling the asset?

Yes, purchase is allowed up to 1 year before the transfer date.

3. Is 54F allowed for NRIs?

54F is available to individuals and HUFs, and it requires the new residential house to be in India. Eligibility and NRI mechanics depend on residency and return filing specifics, so verify your exact case with the latest rules and your tax professional.

4. Is there a maximum exemption cap?

Your eligible investment for the exemption calculation (house + CGAS) is capped at ₹10 crore.

Disclaimer: This draft is for general information. Tax rules change and outcomes depend on your facts. Verify with the Income Tax Act, notifications, and a qualified tax professional before acting.