Capital gains tax relief: how reinvesting in a house works

You can buy land, build a house to claim full exemption on total costs, including construction

- Shipra Singh

Selling long-term capital assets can yield a windfall but also attract hefty capital gains tax.

If you plan to sell such assets, you can save tax under sections 54 and 54F of the Income Tax Act by reinvesting the proceeds in a house.

Section 54 applies when you sell a residential property. You can claim exemption on long-term capital gains (LTCG) by using the gains to buy another residential property. The new house must be bought within one year before or two years after the sale, or constructed within three years.

Section 54F extends this benefit to gains from other capital assets such as domestic and overseas shares, equity mutual funds, gold, or commercial property. But it comes with stricter rules: you must reinvest the full sale proceeds, not just the gains, and you cannot own more than one house at the time of sale. Under both sections, the exemption is withdrawn if the new house is sold within three years of purchase. There are other nuances too—in joint ownership, the exemption applies only to your share of the purchase or sale value. Mint explains how sections 54 and 54F work and how they can help reduce your tax burden.

Do gains from debt funds qualify for exemption?

No. Only long-term capital gains (LTCG) qualify for exemption under Section 54F. “Since the July 2024 budget changes, assets such as debt mutual funds, market-linked debentures and unlisted bonds are treated as short-term regardless of holding period. Hence, gains from these aren't eligible for 54F exemption,” said Neeraj Agarwala, partner, Nangia & Co LLP.