Published 19 October 2026
Most sellers of property who pay no capital gains tax owe nothing because they reinvested, not because they made no gain. The law gives three routes: buy or build a house, or buy specified bonds. Each has its own window measured from the date of transfer, its own ceiling, and its own lock-in. Where the money cannot be spent before the return is due, it must be parked in a special bank account by that date. Missing a date usually costs the exemption, and the courts have not always agreed on which date counts. This guide sets out the conditions and the deadlines under both Acts.
Which Act applies
The exemption follows the Act that taxes the gain, which depends on the date of transfer (see Capital Gains on Selling Property).
| Exemption | 1961 Act (transfers up to 31 March 2026) | 2025 Act (transfers from 1 April 2026) |
|---|---|---|
| Residential house sold, residential house bought | Section 54 | Section 82 |
| Any other long-term asset sold, residential house bought | Section 54F | Section 86 |
| Land or building sold, bonds bought | Section 54EC | Section 85 |
Reinvestment windows often straddle 1 April 2026. A flat sold in January 2026 may be replaced in 2027, with the money held in the Capital Gains Account Scheme meanwhile. The exemption is claimed under section 54 in the 1961 Act return for assessment year 2026-27. Section 536(2)(h) of the 2025 Act then deals with any withdrawal of that exemption that falls in a later year. Such a sum is “deemed to be the income” of that later tax year and taxed “under the same head of income as it would have been included under the repealed Income-tax Act” (section 536). The Capital Gains Accounts Scheme, 1988 continues in force through section 536(2)(j), which keeps any “scheme framed” under the repealed Act in force so far as it is consistent with the new Act.
Section 54 / section 82: house for house
Who. An individual or HUF.
Original asset. A long-term capital asset, being a residential house whose income is chargeable under “Income from house property”.
New asset. One residential house in India:
- purchased within one year before, or two years after, the date of transfer; or
- constructed within three years after that date.
How much is exempt. The gain is exempt up to the cost of the new house. Any excess is taxed.
Two houses, once. If the gain does not exceed Rs 2 crore, the seller may instead buy or build two houses. This option can be used only once: having used it, the seller cannot use it again “for the same or any other assessment year” (first and second provisos to section 54(1); section 82(5), (6)).
The Rs 10 crore cap. The Finance Act, 2023 inserted two caps from assessment year 2024-25:
- cost of the new asset above Rs 10 crore is ignored (third proviso to section 54(1); section 82(7));
- capital gain above Rs 10 crore is ignored for the Capital Gains Account Scheme deposit (second proviso to section 54(2); section 82(8)).
Lock-in. If the new house is sold within three years of its purchase or construction, the exempted gain comes back. Its cost is reduced by the exempted gain, or treated as nil, in computing the gain on that sale (section 54(1)(i), (ii); section 82(1)(i), (ii)).
Section 54F / section 86: any other asset into a house
Who. An individual or HUF.
Original asset. Any long-term capital asset that is not a residential house, such as a plot of land, a shop, shares or gold.
New asset. One residential house in India, within the same windows as section 54.
How much is exempt. The test is the net consideration (sale price less transfer expenses), not the gain:
- if the whole net consideration is invested, the whole gain is exempt;
- if part is invested, the exemption is the gain multiplied by the cost of the new house and divided by the net consideration (section 54F(1)(a), (b); section 86(1)(i), (ii)).
The ownership condition. The exemption is lost if, on the date of transfer, the seller owns more than one residential house other than the new one. It is also lost if the seller buys another house within one year, or builds one within three years, and income from it is taxable as house property (proviso to section 54F(1); section 86(5)).
Later withdrawal. Buying another house within two years, or building one within three years, after the transfer brings the exempted gain back to tax in that year (section 54F(2); section 86(6)). Selling the new house within three years does the same (section 54F(3); section 86(7)).
Rs 10 crore caps. Cost of the new asset above Rs 10 crore is ignored. So is net consideration above Rs 10 crore for the deposit (provisos to section 54F(1) and (4), inserted by the Finance Act, 2023; section 86(8), (9)).
Section 54EC / section 85: bonds
Who. Any assessee, not only individuals.
Original asset. Land or building, or both, held long-term.
New asset. A “long-term specified asset”, meaning a bond redeemable after five years and issued on or after 1 April 2018 by the National Highways Authority of India or the Rural Electrification Corporation Limited, or another bond notified by the Central Government (Explanation to section 54EC; section 85(6)).
Time. The bonds must be bought within six months after the date of transfer.
Ceiling. Rs 50 lakh in a financial year, and Rs 50 lakh across the year of transfer and the next year taken together (provisos to section 54EC(1); section 85(2)).
Lock-in. The exempted gain becomes taxable if the bonds are transferred or converted into money within five years. Taking a loan against them counts as converting them (section 54EC(2) and its proviso and Explanation; section 85(3), (4)). The same investment cannot also be claimed under section 80C or section 123 (section 54EC(3)(b); section 85(5)).
The statutes do not prevent part of the same gain being covered by a house under section 54 and the rest by bonds under section 54EC. Each section exempts only the part matched by its own investment.
The Capital Gains Account Scheme
When it is needed. Under sections 54 and 54F (and sections 82 and 86), any amount not used for the new house before the return is filed must be deposited in the Scheme. The deposit must be made “before furnishing such return” and in any case “not later than the due date applicable … for furnishing the return of income under sub-section (1) of section 139”. The return must be accompanied by proof of the deposit (section 54(2); section 54F(4); section 82(2); section 86(2), which refers to section 263). The amount already spent plus the deposit is treated as the cost of the new asset. Section 54EC has no deposit route: the bonds themselves must be bought within six months.
The two accounts. As quoted by the Andhra Pradesh High Court in Sadula Janardhan (HUF) v State Bank of Hyderabad (13 July 2006), paragraph 4 of the Capital Gains Accounts Scheme, 1988 provides two accounts:
- Deposit account-A, a savings deposit from which withdrawals “can be made from time to time”;
- Deposit account-B, a term deposit, cumulative or non-cumulative, from which withdrawal is normally made only on maturity.
A depositor who needs money from account-B first transfers it to account-A in Form B. If this happens before maturity, it is treated as premature withdrawal.
If the money is not used. Any amount not used within the windows (two years to buy, three to build) is taxed as capital gain of the year in which three years from the original transfer expire. The depositor may then withdraw it (proviso to section 54(2); section 82(4); proviso to section 54F(4); section 86(4)).
Closing the account. Closure needs the Assessing Officer’s approval on Form G. In Chandu Nair v ITO (Madras High Court, 28 July 2025, W.P. No. 27856 of 2025), the petitioner had sold shares in assessment year 2012-13 and deposited Rs 2 crore in Scheme accounts. He could not use the money for a house within three years, and applied in Form G on 28 December 2023 for approval to close seven accounts. More than a year later the Assessing Officer had not acted. The Court did not examine the merits. It directed the officer to approve and endorse Form G and issue a no-objection certificate within four weeks.
Which deadline: section 139(1) or the extended return date?
Sections 54(2) and 54F(4) refer to “the return of income under section 139” for spending the money, but to the section 139(1) due date for the deposit. Some taxpayers missed both but bought the house before a belated return was due, and some High Courts have allowed the claim. In CIT v Jagtar Singh Chawla (Punjab and Haryana High Court, 20 March 2013, ITA No. 71 of 2012), the assessee sold agricultural land and a house on 20 June 2006. He put the proceeds in a “Flexi General Account” instead of the Scheme, and then bought a house. The Revenue argued that the money had to be deposited or invested by the section 139(1) date. The Court followed CIT v Rajesh Kumar Jalan (Gauhati High Court, (2006) 286 ITR 274) and Fathima Bai v ITO (Karnataka High Court). It held that section 139(4) “is, in fact, a proviso” to section 139(1). Because the house was acquired within the extended period, the gain was not taxable.
The statutory words have not changed since. The Revenue’s contrary reading rests on the bracketed words that fix the section 139(1) date for the deposit. This guide has not traced a Supreme Court ruling that settles the point. The 2025 Act repeats the structure: use “before filing the return of income under section 263”, and deposit “not later than the due date applicable … under section 263(1)” (section 82(2)). Whether the extended-period reading carries over to section 263 has not yet been tested.
What to have ready
- The date of transfer and the computation of the gain and net consideration (see Capital Gains on Selling Property).
- For a house: the purchase deed or allotment letter with dates and payments, or construction bills and the completion certificate. Include payments made before the return date, from the buyer’s bank statement.
- For section 54F: a list of residential houses owned on the date of transfer.
- For bonds: the allotment advice showing the date of allotment and the amount, within six months.
- For the Scheme: the deposit receipt or passbook, with a date on or before the section 139(1) or section 263(1) due date.
Claiming the exemption
The form. The exemption is claimed in the capital gains schedule of the return (ITR-2 or ITR-3 under the 1961 Act), which records the date and cost of the new asset and any Scheme deposit. The ITR-2 walkthrough for a residential property sale with a section 54EC claim shows the entries. For transfers from 1 April 2026 the claim is made in the return under section 263 for the tax year of transfer.
Due dates. The deposit is due by the section 139(1) or section 263(1) date. The house must be bought within two years or built within three years, and bonds bought within six months, all measured from the date of transfer.
Verification. The return is verified as described in E-Verifying a Return.
What a breach costs, and what can be fixed
A lost or withdrawn exemption is taxed as capital gain of the year the law specifies. Interest for advance tax shortfall may follow (see Advance Tax and Self-Assessment Tax). An exemption omitted from the original return can be added by a revised return within time. An updated return cannot be used to reduce the tax or increase a refund, so it cannot add an exemption (see Belated and Revised Returns and The Updated Return (ITR-U)). A Scheme deposit made after the deadline cannot be backdated.
Summary
- Identify the original asset. A residential house points to section 54 or section 82. Any other long-term asset points to section 54F or section 86. Land or building can also go to section 54EC or section 85.
- Count the windows from the date of transfer: one year before or two after to buy, three after to build, six months for bonds.
- Apply the caps: Rs 10 crore on the new house and on the deposit, Rs 50 lakh on bonds, and the once-only two-house option for gains up to Rs 2 crore.
- Deposit any unspent amount in the Capital Gains Account Scheme by the section 139(1) or section 263(1) due date, and keep the receipt for the return.
- Respect the lock-ins: three years for the house and five years for the bonds. Under section 54F, do not buy or build another house within the restricted periods.
- Use or withdraw the Scheme deposit within three years. Unused money is taxed in the year the three years expire, and closing the account needs the Assessing Officer’s approval in Form G.
The next guide, Joint, Inherited and Gifted Property, covers property that has more than one owner or came without a purchase.