The short answer
Section 54 of the 1961 Act (now section 82 of the Income-tax Act, 2025): an individual or HUF who sells a residential house held long-term can exempt the gain by buying another residential house in India within one year before or two years after the sale, or constructing one within three years. The exemption is the lower of the gain and the amount invested, and the amount counted is capped at ₹10 crore. Once in a lifetime, a gain of up to ₹2 crore can be invested in two houses.
Section 54EC of the 1961 Act (now section 85): anyone with a long-term gain from land or a building can invest up to ₹50 lakh of it in specified bonds within six months of the sale. The bonds are locked in for five years.
Section 54F of the 1961 Act (now section 86): an individual or HUF with a long-term gain from any asset other than a residential house — a plot, a shop, shares — can exempt it by investing the net sale consideration in one residential house in India, within the same time limits as section 54. Investing only part of the proceeds gives a proportionate exemption. The seller must not own more than one house (other than the new one) on the date of sale.
If you have not invested by the due date for your return, deposit the unused amount in a Capital Gains Account Scheme account at a bank before that date to keep the exemption alive. Sell the new house within three years, or break the bond lock-in, and the exemption is taken back.
A note on section numbers: the Income-tax Act, 2025 has applied from 1 April 2026 (the start of tax year 2026-27). Anything that happened before that date — a sale, a rent payment, a deduction — is governed by the Income-tax Act, 1961 and its section numbers. This guide gives both numbers where the new one has been confirmed.
Which exemption fits which sale
Sold a residential house (long-term) → section 54/82 if you reinvest in a house; section 54EC/85 bonds for the part you do not reinvest; or both together.
Sold a plot, a shop, an office or other land or building (long-term) → section 54F/86 if you reinvest in a house; section 54EC/85 bonds; or a combination.
Sold shares, gold or other assets (long-term) → section 54F/86 only. The 54EC bonds are limited to gains from land or buildings since the Finance Act, 2018.
Short-term gains → none of these exemptions applies.
The exemptions apply to the long-term gain however it is computed, including after choosing between 12.5% without indexation and 20% with indexation. Work out the gain under the option that gives the lower tax first; then apply the exemption to that gain.
Section 54 (now section 82): selling a house, buying a house
Who: individuals and HUFs. Not companies or firms. Residents and non-residents both qualify, but the new house must be in India.
What was sold: a long-term capital asset that is a residential house — a building or land appurtenant to it — whose income was chargeable under 'income from house property'. A flat, an independent house or a builder floor qualifies; a vacant plot does not (use section 54F for that).
What must be bought: one residential house in India, purchased within one year before or two years after the date of transfer, or constructed within three years after it. Booking an under-construction flat from a builder has generally been treated as 'construction' for this purpose, which gives three years; keep the allotment letter and the builder's payment receipts.
Amount exempt: the lower of the long-term gain and the cost of the new house. If the gain is ₹50 lakh and the new house costs ₹40 lakh, ₹40 lakh is exempt and ₹10 lakh is taxable.
The ₹10 crore cap: from the Finance Act, 2023, if the cost of the new house exceeds ₹10 crore, the excess is not counted. A gain of ₹15 crore invested in a ₹15 crore house gets an exemption of ₹10 crore; the balance is taxed.
The two-house option: where the long-term gain does not exceed ₹2 crore, the taxpayer may choose to invest in two residential houses in India instead of one. This option can be used only once in a lifetime; once exercised for one sale, it is not available again.
Section 54EC (now section 85): the bonds
Who: any taxpayer with a long-term gain from land or a building.
Investment: in bonds specified for this purpose, within six months of the date of transfer. The maximum investment is ₹50 lakh in the tax year of the transfer and the following tax year taken together, whichever bonds you choose.
Lock-in: five years from the date of allotment. If you transfer the bonds, convert them into money, or take a loan or advance against them within five years, the exempted gain becomes taxable as a long-term gain in the year you do so.
Issuers: the issuers currently offering these bonds are public sector undertakings such as REC, PFC, IRFC and HUDCO. NHAI, a long-standing issuer, stopped issuing 54EC bonds from 1 April 2022. The list changes; check the current notification and the issuer's website before you invest, and do not rely on an old list.
Interest: the bonds have paid around 5.25% a year recently. The interest is taxable in full; only the capital gain is exempt.
The six-month clock is strict and runs from the date of transfer — usually the sale deed date — not from when you receive the money. An application cheque that has not been realised and allotted by the deadline can cost you the exemption; apply well before the last few days.
Section 54F (now section 86): selling anything else, buying a house
Who: individuals and HUFs.
What was sold: any long-term capital asset other than a residential house — a plot, commercial property, agricultural land in a non-rural area, shares, gold.
Condition: on the date of the sale you must not own more than one residential house other than the new one. You must also not buy another house within two years, or construct one within three years, after the sale, other than the new house.
What must be invested: the net sale consideration (sale price minus selling expenses), not just the gain, in one residential house in India, within one year before or two years after the sale, or constructed within three years.
Amount exempt: gain × amount invested ÷ net sale consideration. If you invest all the net consideration, the whole gain is exempt; if half, half the gain is exempt. The investment counted is capped at ₹10 crore from the Finance Act, 2023.
The Capital Gains Account Scheme
You often will not have bought or finished building the new house by the time your return is due. To keep the exemption, deposit the amount you intend to invest — the gain, for section 54; the net consideration, for section 54F — in an account under the Capital Gains Accounts Scheme, 1988, at an authorised bank, on or before the due date for furnishing your return for the year of the sale (31 July for most individuals not under audit). The deposit counts as invested for the exemption.
Then use the money from that account to buy or build the house within the original two- or three-year deadline. Withdrawals are made against the scheme's forms and must be used within 60 days for the stated purpose.
If any part of the deposit is not used within the deadline, that unused part is taxed as a long-term gain in the tax year in which three years from the sale end. You can then withdraw it, under the scheme's procedure.
The scheme was revised by amendments notified in 2025, which extended it to a number of private sector banks in addition to public sector banks and added electronic payment and statement options. Ask your bank whether it is authorised before you rely on it.
The 54EC bonds have no equivalent account: the bonds must be bought within six months.
When the exemption is taken back
Section 54 (82): if you sell the new house within three years of buying or constructing it, the exempted gain is deducted from its cost when computing the gain on that sale. In effect, the old gain is taxed then, as part of a short-term gain on the new house.
Section 54F (86): if you sell the new house within three years, or buy another house within two years or build one within three years of the original sale, the exempted gain is taxed as a long-term gain in that year.
Section 54EC (85): if you transfer, convert or borrow against the bonds within five years, the exempted gain is taxed as a long-term gain in that year.
Capital Gains Account: any unused balance at the end of the period is taxed, as above.
Worked example 1: section 54 with a partly invested gain
Illustrative numbers only. A resident individual sells a flat in 2026-27 with a long-term gain of ₹50,00,000 (after choosing the cheaper of the two rate options, which here is 12.5% without indexation). She buys a new flat for ₹40,00,000 within two years.
Exempt under section 82 (section 54 of the 1961 Act): the lower of ₹50,00,000 and ₹40,00,000 = ₹40,00,000. Taxable gain: ₹10,00,000. Tax at 12.5%: ₹1,25,000, plus 4% cess = ₹1,30,000.
If she also puts ₹10,00,000 into 54EC bonds within six months, the remaining gain is exempt too, and the tax is nil.
Worked example 2: the two-house option
Illustrative numbers only. A resident sells a house with a long-term gain of ₹1,80,00,000. He buys two flats, for ₹1,00,00,000 and ₹90,00,000, within the time allowed. The gain is under ₹2 crore, so he may choose to claim the exemption on both: ₹1,90,00,000 invested exceeds the ₹1,80,00,000 gain, and the whole gain is exempt.
He can make this choice only once in his lifetime. If he expects a larger sale later, he should weigh whether to use the option now.
Worked example 3: section 54F on a plot
Illustrative numbers only. A resident owning one house sells a plot held for ten years for ₹1,02,00,000, paying ₹2,00,000 brokerage. Net consideration: ₹1,00,00,000. The long-term gain is ₹60,00,000. She invests ₹75,00,000 in a new house within two years.
Exempt under section 86 (section 54F of the 1961 Act): ₹60,00,000 × ₹75,00,000 ÷ ₹1,00,00,000 = ₹45,00,000. Taxable gain: ₹15,00,000.
Note the difference from section 54: investing ₹60,00,000 (equal to the gain) would have exempted only ₹36,00,000 here, because section 54F looks at the net consideration, not the gain.
She could also put up to ₹15,00,000 into 54EC bonds within six months to cover the rest, since the plot is land.
Worked example 4: the Capital Gains Account deposit
Illustrative numbers only. A resident sells a flat in October 2026 with a long-term gain of ₹30,00,000 and plans to build a house on land he owns. He has not started by 31 July 2027, the due date for his return.
Before 31 July 2027 he deposits ₹30,00,000 in a Capital Gains Account and claims the exemption in his return. He withdraws money as construction proceeds and completes the house by October 2029, using ₹26,00,000. The unused ₹4,00,000 is taxed as a long-term gain in tax year 2029-30, the year in which three years from the sale end.
Points that cause disputes
The new house in your spouse's name. Courts have taken differing views on whether section 54 is available when the new house is bought in the spouse's or a child's name with the seller's money. The safest course is to buy the new house in your own name or jointly with yourself as an owner.
Land bought for construction. The cost of land forms part of the cost of constructing a house, but the construction must be completed within three years. Buying only a plot and not building is not enough.
Two flats combined into one. Adjacent flats bought and combined into a single residential unit have often been accepted as one house. Two flats in different locations are two houses and need the once-in-a-lifetime option.
A house outside India. Not eligible from the Finance (No. 2) Act, 2014 onwards; the new house must be in India.
Home loan funded purchase. The exemption looks at investment in the new house within the deadline, not at whether the money came from the sale. Courts have generally allowed it when the house was bought with a loan, though a tax officer may question it; keep clear records.
Common mistakes
Missing the six-month deadline for 54EC bonds, often by waiting for the sale proceeds to clear.
Investing only the gain under section 54F; it is the net sale consideration that must be invested for a full exemption.
Forgetting to deposit in the Capital Gains Account Scheme before the return due date, and losing the exemption even though the house is bought later within the deadline.
Selling the new house within three years and not realising the exemption is reversed.
Taking a loan against 54EC bonds during the lock-in.
Claiming the two-house option twice, or for a gain over ₹2 crore.
Assuming NHAI 54EC bonds are still on sale; check which issuers are currently offering them.
Using the exemption against a short-term gain. These exemptions are for long-term gains only.
This is general information, not tax or legal advice. Tax law, rates and forms change with each Finance Act; confirm how the rules apply to your own facts with a chartered accountant before you sign, pay or file.
Common questions
What is section 54 called in the new Income-tax Act, 2025?
Section 82. Section 54EC is now section 85 and section 54F is section 86. The conditions are carried forward. Sales before 1 April 2026 use the 1961 section numbers.
How much can I invest in 54EC bonds?
Up to ₹50 lakh, within six months of the sale, counting the tax year of the sale and the next one together. The bonds are locked in for five years and the interest is taxable.
Which 54EC bonds can I buy now?
Bonds of the public sector issuers currently notified for the purpose, such as REC, PFC, IRFC and HUDCO. NHAI stopped issuing these bonds from 1 April 2022. Check the issuer's website and the latest notification before applying.
Can I claim section 54 on two houses?
Once in a lifetime, if the long-term gain does not exceed ₹2 crore. Otherwise, one house.
Is there a limit on the section 54 exemption?
Yes. Investment above ₹10 crore in the new house is not counted, from the Finance Act, 2023. The same cap applies under section 54F.
What if I cannot buy the new house before filing my return?
Deposit the amount in a Capital Gains Account Scheme account at an authorised bank before the return due date, claim the exemption, and use the money within the two- or three-year deadline. Any unused part is taxed later.
Can I use both section 54 and 54EC on one sale?
Yes. Part of the gain can go into a new house and part into 54EC bonds, each within its own limits and deadlines.
I sold a plot, not a house. Which exemption applies?
Section 54F (section 86 of the 2025 Act) if you invest the net sale consideration in a house and own no more than one other house, or 54EC bonds (section 85) up to ₹50 lakh, or both.
Sources
- Income-tax Act, 2025, incometaxindia.gov.in: section 82 (earlier section 54), section 85 (earlier 54EC), section 86 (earlier 54F); checked 2 October 2026
- Income-tax Act, 1961, indiacode.nic.in: sections 54, 54EC and 54F, including the ₹10 crore cap inserted by the Finance Act, 2023 and the ₹2 crore two-house option inserted by the Finance (No. 2) Act, 2019; checked 2 October 2026
- Union Budget 2023-24, Memorandum explaining the Finance Bill, 2023 — cap on deductions under sections 54 and 54F; indiabudget.gov.in; checked 2 October 2026
- Capital Gains Accounts Scheme, 1988, as amended by the Capital Gains Accounts (Second Amendment) Scheme, 2025 (notified 19 November 2025); checked 2 October 2026
- Issuer websites of REC, PFC, IRFC and HUDCO for current 54EC bond issues and interest; NHAI discontinued 54EC bonds from 1 April 2022; checked 2 October 2026
Last checked 2026-10-02.