Section 54F Exemption: Sell Any Asset, Buy a House
Section 86 of the Income-tax Act, 2025 (old section 54F) exempts an individual's or HUF's long-term gain on selling any asset other than a house (a plot, shop, shares, gold) if the net sale price goes into one residential house in India, bought a year before or two years after the sale, or built within three. Invest less and the exemption shrinks in proportion.
Key takeaways
- Land, commercial property, shares, mutual funds and gold all qualify, if held long-term.
- The net sale consideration, not just the gain, must be invested for a full exemption.
- On the date of sale you can own at most one residential house besides the new one, and you mustn't buy another within one year or build another within three.
- Only the first Rs 10 crore of the new house's cost, and of the net consideration, counts.
- Money not spent by your return due date goes into the Capital Gains Account Scheme, or that part of the exemption is lost.
- Sell the new house within three years, or buy a second one within two, and the exempted gain is taxed that year.
Which assets qualify under section 86
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026: section 54F is now section 86, section 54 is section 82 and section 54EC is section 85. Section 86 follows 54F closely, with "tax year" in place of "previous year". Sales before April 2026 are still reported under the old section. How the gain itself is worked out is in our capital gains tax guide; this page covers only the reinvestment exemption, which applies to any long-term capital asset that isn't a residential house:
| Asset sold | Long-term after | Typical tax without relief | Section 86 available? |
|---|---|---|---|
| Residential plot or non-agricultural land | 24 months | 12.5% (or 20% indexed if bought before 23 July 2024) | Yes |
| Shop, office, warehouse | 24 months | 12.5% (or 20% indexed, same condition) | Yes |
| Listed shares, equity mutual funds | 12 months | 12.5% above the Rs 1.25 lakh yearly exemption | Yes |
| Unlisted shares, gold, jewellery | 24 months | 12.5% | Yes |
| Urban agricultural land | 24 months | 12.5% (or 20% indexed) | Yes; see our note on agricultural land |
| A residential house | 24 months | 12.5% (or 20% indexed) | No; use section 82 (old 54) |
Rural agricultural land isn't a capital asset, so there's nothing to exempt. Short-term gains get no relief, and companies, firms and LLPs can't claim it.
The conditions, one by one
The time windows
You must buy one residential house in India within one year before or two years after the date of transfer, or build one within three years. A flat abroad doesn't count, and nor does a bare plot unless the house on it is built within the three years.
Booking a flat with a builder is generally treated as construction. CBDT circulars 471 (1986) and 672 (1993) said so for DDA-type allotments, and courts have extended that to builders; several rulings held that investing within three years is enough even if handover comes later. Keep every payment receipt.
The ownership test
The exemption is denied if, on the date you sell the original asset, you own more than one residential house other than the new one. Own one flat already? You're fine. Own two? Section 86 is closed to you, whatever the size of the gain. Rulings differ on whether a part-share in an inherited house counts, so take advice if you hold one.
It is also denied if you buy any other residential house, besides the new one, within one year after the sale, or build one within three years.
The Rs 10 crore ceiling
Since the Finance Act 2023, now carried into section 86, any cost of the new house above Rs 10 crore is ignored, and so is any net consideration above Rs 10 crore.
Whose name the house is in
The Delhi High Court in Kamal Wahal allowed the exemption for a house bought in the wife's name; the Punjab and Haryana High Court in Kamal Kant Kamboj disagreed. Buying in your own or joint name avoids the argument.
The proportionate formula
Section 82 asks you to reinvest only the gain. Section 86 asks for the net consideration: the sale price minus expenses incurred wholly for the sale, such as brokerage. The rule:
- If the new house costs at least the net consideration, the whole gain is exempt.
- If it costs less, exempt gain = capital gain × cost of new house ÷ net consideration.
A worked example
You bought a residential plot in 2012 for Rs 40 lakh and sell it in August 2026 for Rs 1.2 crore, paying Rs 2 lakh in brokerage. You choose the 12.5% rate without indexation.
- Net consideration: Rs 1,20,00,000 − Rs 2,00,000 = Rs 1,18,00,000
- Long-term gain: Rs 1,18,00,000 − Rs 40,00,000 = Rs 78,00,000
- Tax with no relief: Rs 78 lakh × 12.5% = Rs 9,75,000, plus 4% cess = Rs 10,14,000
You buy a flat for Rs 90 lakh.
- Exempt gain: Rs 78,00,000 × 90 ÷ 118 = Rs 59,49,153
- Taxable gain: Rs 78,00,000 − Rs 59,49,153 = Rs 18,50,847
- Tax: Rs 18,50,847 × 12.5% = Rs 2,31,356, plus 4% cess = Rs 2,40,610
Put the whole Rs 1.18 crore into the flat and the tax is nil. Surcharge applies on top at higher incomes. Whether stamp duty on the new flat counts as part of its cost is disputed between advisers, so don't rely on it to close a gap.
Deadlines, deposits and clawback
Parking unspent money
Whatever part of the net consideration you haven't spent on the new house by the due date of your return has to be deposited in a Capital Gains Account Scheme account before that date. For the tax year 2025-26 that was 31 July 2026 for ITR-1 and ITR-2 filers and 31 August 2026 for ITR-3 and ITR-4 filers without an audit, the later date being a Budget 2026 change.
If three years pass from the sale and some of the deposit hasn't gone into the house, the unused share of the exemption is taxed in the year the three years end. In the example above, if Rs 10 lakh of the deposit is never used, Rs 78 lakh × 10 ÷ 118 = Rs 6,61,017 becomes long-term gain of that year, costing about Rs 85,932 with cess.
What withdraws the exemption
| Trigger | Deadline | What is taxed | In which year |
|---|---|---|---|
| You sell the new house | Within 3 years of buying or building it | The gain exempted earlier, as long-term gain (the new sale is taxed separately) | Year of that sale |
| You buy another house | Within 2 years of the original sale | The gain exempted earlier | Year of the second purchase |
| You build another house | Within 3 years of the original sale | The gain exempted earlier | Year it is built |
| CGAS money left unused | 3 years from the original sale | Proportionate share of the exemption | Year the 3 years end |
Buying a second house within one year denies the exemption outright; in the second year, it withdraws it.
Section 86 vs section 82 vs section 85
| Section 86 (old 54F) | Section 82 (old 54) | Section 85 (old 54EC) | |
|---|---|---|---|
| Asset sold | Anything except a residential house | A residential house | Land or building |
| Reinvest in | One house in India | One house (two, once in a lifetime, if gain is up to Rs 2 crore) | Specified bonds of NHAI, REC, PFC, IRFC and similar issuers |
| Amount to invest | Net consideration | Capital gain | Capital gain, up to Rs 50 lakh |
| Window | 1 year before or 2 years after; 3 to build | Same | 6 months after the sale |
| Cap | Rs 10 crore | Rs 10 crore | Rs 50 lakh |
| Lock-in | 3 years | 3 years | 5 years |
| Ownership limit | At most one other house | None | None |
If you sold land and don't want another home, see our guide to section 54EC bonds.
Where section 86 is the wrong tool
- You already own two homes. The ownership test shuts you out; bonds need a land or building sale.
- You need the money within three years. Selling in year two costs you the exemption plus transaction costs both ways.
- The gain is small next to the price. Selling Rs 50 lakh of gold with a Rs 5 lakh gain and sheltering it in a Rs 50 lakh flat ties up all the principal to save Rs 65,000 of tax (Rs 5 lakh at 12.5% plus cess). Only worth it if you wanted the flat anyway.
Frequently asked questions
What is the new section number for 54F under the Income-tax Act, 2025?
It is section 86 of the Income-tax Act, 2025, in force from 1 April 2026. The conditions carry over from section 54F: one residential house in India, bought one year before or two years after the sale or built within three, the net consideration invested, the Rs 10 crore ceiling and the three-year lock-in. Sales before April 2026 are still reported under old section 54F.
Can I claim section 54F after selling shares or mutual funds?
Yes. Listed shares and equity funds held over 12 months are long-term capital assets that aren't houses, so selling them and buying a home qualifies. The catch is the formula: you must invest the net sale proceeds, not just the gain, for a full exemption. The gain above the Rs 1.25 lakh yearly exemption is what gets sheltered.
Can I claim 54F if I already own one house?
Yes. The bar is owning more than one residential house, other than the new one, on the date you sell the original asset. One existing home plus the new one is allowed. What you can't do is buy a further house within one year of the sale, or build one within three years, besides the new house.
Does an under-construction flat qualify for 54F?
Generally yes. A builder booking is treated as construction, so the three-year window applies, and several rulings allow the exemption if you invested the money within three years even when handover comes later. Payments you haven't made by the return due date must sit in a Capital Gains Account Scheme account in the meantime.
What happens if I sell the new house within three years?
The gain that was exempted on the original sale is taxed as long-term capital gain in the tax year you sell the new house. That's in addition to any gain on the new house itself, which is taxed on its own terms. The three years run from the date you bought or completed the new house.
If you're lining up a home purchase against a plot, shop or share sale, Realty Hunting can help you match the right property to the deadlines above.
Sources
The figures and rules in this post were researched against these sources. Government and regulator sources are listed first. Rates, fees and rules change; check the current figure with the authority before you pay or sign.
