Homeowners planning to sell their residential property and reinvest the profits into an under-construction building can still claim long-term capital gains tax exemption under Section 54 — if they follow the rules carefully.A taxpayer who sells his home and uses the earnings to buy another home is granted relief under Section 54.Gains from the sale of a long-term residential property by an individual or Hindu Undivided Family (HUF) may be tax-free if they are reinvested in another residential home. The exemption is limited to the amount invested in the new home or the capital gain itself.
When selling assets like gold or shares, on the other hand, taxpayers can avoid long-term capital gains tax thanks to the Section 54F exemption of the Income Tax Act. You can claim tax exemption of up to ₹10 crores if you invest the selling profits in a residential property.Timelines Matter for Under-Construction PropertiesThe exemption under Section 54 can be claimed across several fiscal years for a facility that is still under construction. According to the Income Tax Department’s regulations, the construction of the new residence must be completed within three years after the initial property’s sale.
If this is not fulfilled, the exemption can be rejected unless there is a legitimate, court-approved explanation, including construction delays that are out of the taxpayer’s control.Experts advise that invoking Section 54 may not be legally secure if the construction is expected to be completed after those three years due to established building deadlines.However, certain court rulings have permitted exclusions in circumstances of genuine delays, particularly where the builder—rather than the taxpayer—is to blame.Using the Capital Gains Account Scheme (CGAS)Homeowners can put the sale earnings in a Capital Gains Account Scheme (CGAS) if they do not require it immediately because construction is still underway. Then, within the allotted time—typically before the three-year completion deadline—money in the CGAS must be taken out and utilised for the construction or acquisition of real estate.According to the Income Tax Department’s latest statement, deposits under this plan can be accepted by small financing institutions and private sector banks. The CGAS now accepts deposits made with debit cards, credit cards, UPI, BHIM, NEFT, and RTGS.Risks of Selling the New Property Too SoonThe Section 54 benefit can be cancelled if you sell the newly built or purchased home within three years of its completion. In that case, the profits that were previously exempt are taxed at the time of sale and incorporated back into the cost of purchase.
