Suppose you sold a flat purchased 10 years ago and realized a Long-Term Capital Gain (LTCG) of ₹50 lakh. The question arises: do you have to pay tax on the entire ₹50 lakh?

Not necessarily. Section 54 of the Income Tax Act offers an opportunity to save tax if you invest this capital gain in another residential property. The added advantage is that this new property can even be 'under construction'.

Does investing in an under-construction property qualify for Section 54 benefits?
Yes, absolutely. According to the Income Tax Act, if you have sold an old residential house and utilized the resulting Long-Term Capital Gain to construct a new house, you can claim an exemption under Section 54.

Within what timeframe must the construction be completed?
As per the law, the construction of the new house must be completed within three years from the date of the property sale. This is why many investors adopt the strategy of investing in under-construction projects to save on capital gains tax.

What is Section 54?
Section 54 is a provision that offers relief from long-term capital gains tax. It applies to individuals who have:

Sold a residential house
Earned a Long-Term Capital Gain
Purchased or constructed a new residential house
What is the maximum exemption limit under Section 54?
Under current rules, a maximum exemption of up to ₹10 crore can be claimed.

Who can avail the benefits of Section 54?
This benefit is available only to Individuals and Hindu Undivided Families (HUFs).

Who is not eligible for this benefit?
Companies
LLPs
Partnership firms
Trusts
Other entities

Key conditions for Section 54
1. The sold property must be a long-term asset

You must have held the property for a period exceeding 24 months.

2. The property must be a residential house

Income from the property must fall under the head "Income from House Property."

3. The new house must be located in India

The benefit of Section 54 is not available for properties purchased abroad. 4. Adherence to the prescribed time limit is mandatory

Investment Method | Time Limit
Buying a new house | 1 year before or up to 2 years after the sale
Constructing a new house | Within 3 years of the sale

Understand this with an example.
Suppose you sold an old flat, resulting in an LTCG of ₹60 lakh. If you then invest ₹45 lakh in an under-construction property, you will receive an exemption of up to ₹45 lakh under Section 54. The remaining ₹15 lakh will be subject to Capital Gains Tax.

How is the Section 54 exemption calculated?
The tax exemption applies to the lower of the two amounts: the Long-Term Capital Gain or the amount invested in the new house.

Details | Amount
LTCG | ₹70 lakh
New Investment | ₹50 lakh
Section 54 Exemption | ₹50 lakh
Taxable Gain | ₹20 lakh
Is the Capital Gain up to ₹2 crore?
A special benefit may also be available.
If your Capital Gain is ₹2 crore or less, you can claim the Section 54 exemption by investing in two houses—a benefit available once in a lifetime.

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content