Planning to Buy a New Home? Know the Rules for Section 54 Tax Exemption

When you sell a residential house, you normally have to pay capital gains tax on the profit you earn. But Section 54 gives you a way to avoid paying this tax if you use that profit to buy or build another home.

What is Section 54 of Income Tax Act?

Section 54 allows individuals and Hindu Undivided Families (HUFs) to avoid paying tax on the profit from selling their house if they use that money to buy or build another house in India. But, there are some rules you need to follow before you can save on tax under Section 54.

This benefit also applies when the new house is under construction or self-built, but there are specific conditions. If you are constructing or buying an under-construction property, the construction must be completed within 3 years from the date of sale. Even if the builder delays, the tax department usually considers whether you invested the money on time.

According to a tax expert, as per the rule under Section 54, you can save tax only if the new house you are building or buying under construction is fully completed within three years from the date you sold your old house. This means the time gap between selling your old home and getting possession of the new one cannot be more than three years. If the construction does not finish within this period, the tax exemption may not be allowed. He also explains that if the construction of your new house gets delayed for reasons that are not your fault, you may still get the tax exemption even if the three-year deadline is crossed. This usually happens when the builder or seller delays handing over the house, even though you paid the money on time.

He advises people to plan the timing of selling their house wisely so they can fully use the capital gains tax exemption.

What is the Capital Gains Accounts Scheme?

The government has options that help people save tax on capital gains if they are not able to buy a new house in time. This scheme is known as the Capital Gain Account Scheme (CGAS).

The Capital Gain Account Scheme (CGAS) is a special bank account that allows you to save tax on the profit from selling a property if you haven’t bought a new one right away.

If you haven’t used your capital gain money yet, you can put it into a CGAS account before the deadline for filing your income-tax return. Doing this keeps your tax exemption safe, and you can later use that money to buy or build your new house without losing the benefit. But if you miss the deadline and don’t deposit the money in this special account, the tax benefit may be denied even if you invest the money in a new property later.