Section 54 Capital Gains Exemption: ₹10 Crore Cap, CGAS Deadline & Two‑House Rule
Section 54 lets you shelter long‑term capital gains from a residential house sale by reinvesting. Learn how the Finance Act 2023 ₹10 crore cap, the CGAS deposit deadline and the once‑only two‑house option shape your tax outcome.
CA Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Legal basis: Income-tax Act, 1961, Section 54 — Effective: ongoing. Source: https://www.incometaxindia.gov.in/w/section-54-exemption-to-capital-gains-arising-on-transfer-of-residential-house-property. Last reviewed by CA Harun Raaj: October 2026
Section 54 Capital Gains Exemption: The ₹10 Crore Cap, CGAS Deadline and Two‑House Option Explained
If you have sold a residential house in India and wish to minimise the tax on the resulting long‑term capital gain (LTCG), Section 54 of the Income‑tax Act, 1961 is the key provision. The Finance Act 2023 introduced a ₹10 crore ceiling on the cost of the new house that can be counted for exemption, and it reaffirmed the requirement to deposit any un‑utilised gain in the Capital Gains Account Scheme (CGAS) before the income‑tax return due date.
Key point: The ₹10 crore cap limits the exemption to the cost of a new residential house, while a timely CGAS deposit preserves the benefit for any un‑spent gain.
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1. Core requirement of Section 54
- Who can claim: An individual or Hindu Undivided Family (HUF).
- What qualifies: Long‑term capital gain arising from the transfer of a residential house property.
- Re‑investment window:
Only the portion of the gain that is actually reinvested (or deposited in CGAS) qualifies for exemption.
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2. The ₹10 crore cap (Finance Act 2023)
The Finance Act 2023 capped the cost of the new house that can be taken into account for exemption at ₹10 crore, effective from Assessment Year 2024‑25. The same ceiling applies to Section 54F.
Practical impact:
- If you realise a LTCG of ₹14 crore, only the cost of a new house up to ₹10 crore can be used to claim exemption. The remaining ₹4 crore is taxable at the applicable LTCG rate (12.5 % without indexation, or 20 % with indexation for resident individuals/HUFs on assets acquired before 23 July 2024).
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3. The once‑only two‑house option
When the LTCG does not exceed ₹2 crore, the taxpayer may elect to invest the gain in two residential houses instead of one. This election can be exercised only once under Section 54(1). Any subsequent claim is limited to a single house.
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4. Capital Gains Account Scheme (CGAS) – the deadline most miss
If the new house has not been purchased or constructed by the income‑tax return filing deadline, Section 54(2) obliges the un‑utilised portion of the gain to be deposited in the Capital Gains Account Scheme, 1988 at an authorised bank before that deadline.
- Failure to deposit may lead to loss of exemption for the un‑utilised amount.
- Some tribunals (e.g., ITAT Hyderabad) have held that the deposit is not mandatory when the gain is actually invested within the Section 54(1) time‑limits, but relying on that view can invite a tax authority challenge. The safer route is to deposit on time.
- The CGAS balance must be used to purchase (within 2 years) or construct (within 3 years) the new house. Any amount left unused after the period becomes taxable as LTCG in that year.
Due dates for AY 2026‑27 (FY 2025‑26 property sales)
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5. Pitfalls that can strip the exemption
- Lock‑in violation: Selling the newly acquired house within 3 years reverses the exemption; the exempted amount is added back to the cost of the new house when computing gain on its sale.
- Missing the CGAS deadline: Without a timely deposit, the un‑utilised gain is treated as taxable.
- Wrong provision: Section 54 applies only when both the sold and purchased assets are residential houses. For other long‑term assets (commercial property, plots, shares) Section 54F governs.
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6. Section 54 vs Section 54F – quick comparison
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7. Common mistakes to avoid
- Assuming the 2‑year purchase window replaces the ITR‑date CGAS deadline. Section 54(2) still requires a deposit by the filing date if the house is not yet acquired.
- Applying the ₹10 crore cap to the gain instead of the new house cost. The cap limits the portion of the new house’s cost that can be counted for exemption.
- Re‑using the two‑house option. It is a one‑time election; later claims revert to the single‑house rule.
- NRIs claiming indexation. The 20 % with indexation option is available only to resident individuals and HUFs. NRIs are taxed at 12.5 % without indexation for property sold on or after 23 July 2024.
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Disclaimer: This article provides general information and does not constitute tax or financial advice. Individual circumstances vary; please contact us for personalised guidance.
I'm CA Harun Raaj, Visakhapatnam.
If you sold a residential property and the above rules affect you, reach out for a tailored review.
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See Also
Frequently Asked Questions
Can each co‑owner of a jointly‑owned house claim Section 54 on their share of the gain?
Yes. Under Section 54, every individual or HUF can claim exemption on the proportionate share of LTCG they realise. Each co‑owner must separately satisfy the reinvestment or CGAS deposit conditions for their share.
What is the latest date to deposit un‑utilised gain in CGAS for AY 2026‑27?
The CGAS deposit must be made before the income‑tax return filing deadline applicable to the taxpayer – 31 July 2026 for ITR‑2 filers, 31 August 2026 for non‑audited ITR‑3 filers, and 21 November 2026 for audited accounts (CBDT Circular No. 07/2026).
If my LTCG is ₹1.5 crore, can I use the two‑house option for two different cities?
Yes. When the LTCG does not exceed ₹2 crore, the taxpayer may elect to invest the gain in two residential houses, even if they are in separate locations. This election can be exercised only once.
Does the ₹10 crore cap apply to the gain amount or the cost of the new house?
The cap limits the cost of the new residential house that can be counted for exemption. Only up to ₹10 crore of the new house’s purchase or construction cost qualifies; any excess cost does not increase the exemption.
Can an NRI claim the 20 % indexation benefit on a residential property sold after 23 July 2024?
No. The 20 % with indexation option under Section 54 is available only to resident individuals and HUFs. NRIs are taxed at the flat 12.5 % rate without indexation for such sales.
What happens if I sell the newly purchased house within three years?
The exemption is reversed. The amount that was previously exempted is added back to the cost of the new house when computing capital gain on its sale, effectively nullifying the benefit.
Is Section 54 applicable when I sell a commercial property and buy a residential house?
No. Section 54 applies only when both the sold and purchased assets are residential houses. A sale of commercial property, plot or shares must be routed through Section 54F, which has different proportionality and net‑consideration requirements.
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