> **Legal basis:** Section 54, Income Tax Act, 1961 (as amended by Finance Act 2023, effective 1 April 2023) — Effective: ongoing. Source: https://counselvise.com/blogs/section-54-exemption-without-cgas-deposit-itat-hyderabad. Last updated: September 2026. ## The situation this ruling addresses A taxpayer sells a residential property, buys or constructs a new residential house within the Section 54 time limits using the full capital gains, but never deposits the unspent amount in the Capital Gains Account Scheme (CGAS) before filing the ITR — either because the purchase closed before the filing deadline, or the deposit step was simply missed. Assessing Officers have historically denied the Section 54 exemption on the CGAS point alone, treating it as an independent condition rather than a fallback mechanism. The Income Tax Appellate Tribunal (ITAT), Hyderabad Bench has now addressed this squarely. ## The ruling: Nitin Bhatia v. ITO (ITA No. 1472/Hyd/2025) In a decision dated 12 January 2026, the ITAT Hyderabad held, in *Nitin Bhatia v. ITO Ward 12(1), Hyderabad*: > "Section 54(1) represents the substantive and mandatory condition; Section 54(2) is procedural and directory in nature. Deposit in the Capital Gains Account Scheme is not mandatory where the capital gain is actually utilised for purchase or construction of a residential house within the period prescribed under Section 54(1)." The Tribunal allowed the assessee's appeal in full, granting the Section 54 exemption despite there being no CGAS deposit at all — because the actual reinvestment in the new house exceeded the capital gains and was completed within the Section 54(1) window. This ruling is reported through secondary sources; taxpayers relying on it in an ongoing assessment should verify the text against the official ITAT order before citing it. ## Section 54, in brief Section 54 of the Income Tax Act, 1961 exempts capital gains for an individual or HUF when they: - Sell a long-term residential house property (held for more than 24 months). - Purchase a new residential house in India within 1 year before or 2 years after the transfer, or construct one within 3 years. - Do not sell the new house within 3 years of acquisition, under Section 54(6). For transfers on or after 1 April 2023, the first proviso to Section 54(1) (Finance Act 2023) caps the exemption at ₹10 crore; gains above that are taxed regardless of reinvestment. Section 54(2) is the safety valve: if the new house is not yet bought or under construction by the ITR filing date, the unutilised gain must go into a CGAS account with a scheduled bank to keep the exemption claim alive. ## Substantive versus procedural — what the Tribunal actually decided | Provision | Nature | Effect on the exemption | | --- | --- | --- | | Section 54(1) | Substantive, mandatory | Investment in the new house must happen within 2 years (purchase) or 3 years (construction). Missing this window defeats the exemption regardless of CGAS. | | Section 54(2) | Procedural, directory (per this ruling) | CGAS deposit protects the claim only where the new house has not yet been purchased by the ITR filing date. Where investment is already made, non-deposit does not defeat the exemption. | > **Key point:** ITAT Hyderabad has held that CGAS deposit under Section 54(2) is not required where the taxpayer already invested the capital gains in a new residential house within the Section 54(1) time limit. ## Where the exemption still commonly fails **Missing the Section 54(1) time limits.** This ruling only relaxes the CGAS procedural requirement. It does not extend the 2-year purchase window or the 3-year construction window — those remain mandatory. **The ₹10 crore cap.** For property transferred on or after 1 April 2023, the maximum Section 54 exemption is ₹10 crore under the Finance Act 2023 proviso. Gains above this are taxable irrespective of how much is reinvested. **Selling the new house within 3 years.** Under Section 54(6), transferring the new residential property within 3 years of purchase or construction reverses the exemption, and the original capital gains become taxable in the year of that sale. **Investing in more than one house.** Section 54 generally permits investment in only one new residential property. Where the capital gains do not exceed ₹2 crore, the second proviso to Section 54(1) allows investment in two residential houses instead of one — but this election can be exercised only once in the taxpayer's lifetime. **Weak documentation.** Assessing Officers scrutinise the investment trail closely. Retain bank statements linking sale proceeds to the purchase payment, the dated sale and purchase agreements, registration documents, and construction payment receipts. ## What to bring to your CA 1. **Timeline mapping** — plot your transfer date against the 2-year/3-year Section 54(1) window and against your ITR filing date. If the purchase was already complete before filing, the CGAS question may not even arise on these facts. 2. **CGAS as insurance, not a formality** — where the new house purchase is still pending at the time of filing, depositing in CGAS remains the correct protective step and continues to earn interest until withdrawn for the purchase. 3. **Reassessment-stage claims** — where a Section 54 claim was missed in the original return, whether it can still be raised depends on the stage of proceedings and the facts on record; this needs a case-specific review, not a general assumption. 4. **The ₹10 crore cap and computation mechanics** — get your CA to confirm the applicable exemption ceiling and the correct capital gains computation for your specific transfer date before you file. A favourable Tribunal ruling on the CGAS point is useful ammunition if your exemption has been denied on that ground alone — but it does not substitute for meeting the Section 54(1) investment timeline, staying under the ₹10 crore cap, or holding the new property for the mandated 3 years. I'm CA Harun Raaj, Visakhapatnam. If your Section 54 exemption has been questioned over a CGAS deposit, reach out and let's review your assessment. --- ## See Also - [Foreign Assets Disclosure Scheme 2026: Window Closes December 31](https://www.harunraaj.com/blog/foreign-assets-disclosure-scheme-2026-deadline) - [Capital Gains on Property Sale: Agreement to Sell or Registration?](https://www.harunraaj.com/blog/capital-gains-property-sale-agreement-to-sell-vs-registration) - [ESOP TDS Deferral Now 60 Months — But Only With Dual Certification](https://www.harunraaj.com/blog/esop-tds-deferral-60-months-dual-certification) Canonical: https://www.harunraaj.com/blog/section-54-cgas-deposit-not-mandatory-itat-ruling