Capital gains taxation in India shifted decisively after indexation benefits were removed and holding periods restructured in July 2024. As a result, reinvestment exemptions under Sections 54, 54B, 54EC, 54F, and 54GB have become the primary legal mechanisms to shelter gains. With proper timing and reinvestment, a substantial long-term capital gains (LTCG) liability can be legally reduced — in some cases to zero.
Key facts & figures
The Income-tax Act provides structured pathways to offset LTCG through specific reinvestments:
| Section | Asset sold | Reinvested in | Time limit | Exemption cap |
|---|---|---|---|---|
| 54 | Residential house | Residential house | 1 yr before / 2 yrs after (buy) or 3 yrs (construct) | Up to ₹10 crore |
| 54F | Any asset (except house) | Residential house | 1 yr before / 2 yrs after (buy) or 3 yrs (construct) | Proportionate, capped at ₹10 crore |
| 54EC | Land or building | Specified bonds (NHAI, REC, PFC, IRFC, HUDCO) | 6 months from transfer | Up to ₹50 lakh |
| 54B | Agricultural land | Agricultural land | 2 years after transfer | Lower of gain or investment |
| 54GB | Residential house / plot | Equity in an eligible startup | By ITR due date / CGAS deposit | Proportionate to net consideration |
Capital-loss set-off is a further lever. Short-term capital losses can be set off against both STCG and LTCG, but long-term losses can only be set off against LTCG. Unabsorbed losses carry forward for eight years, provided the return was filed by the due date. LTCG on listed equity and equity-oriented funds is also exempt up to ₹1.25 lakh per year — investors use 'tax harvesting' to book gains up to this limit annually and step up their cost base without tax.
Recent changes
From 23 July 2024, indexation was broadly abolished and a flat 12.5% LTCG rate set for most assets. To protect older holdings, a property grandfathering clause was enacted: resident individuals and HUFs selling land or buildings acquired before 23 July 2024 may compute tax at 12.5% without indexation or 20% with indexation, whichever is lower. This option is not available to non-residents, companies, or LLPs.
The Section 54GB sunset (sell a house, invest in an eligible DPIIT-recognised startup) was extended to 31 March 2026. HUDCO bonds issued on or after 1 April 2025 were notified as eligible Section 54EC investments. The Capital Gains Accounts (Second Amendment) Scheme, 2025 also extended procedural relief to Section 54GA deposits before the ITR deadline.
Common pitfalls
- Section 54GB has strict lock-ins: the taxpayer must hold more than 25% of the startup's voting rights or capital. If shares are sold in a secondary round within the 5-year lock-in, the exempted gain becomes taxable retrospectively, with interest under Section 234B.
- If reinvestment funds under 54/54B/54F are not deployed before the ITR due date, they must be parked in a Capital Gains Account Scheme (CGAS) account — leaving them in a regular savings account voids the exemption.
- Section 54 needs only the capital gain reinvested for full exemption; Section 54F needs the entire net sale consideration — reinvesting only the gain gives a proportionate exemption.
Frequently asked questions
Can I buy two houses to claim Section 54?
Generally the exemption is for one residential house in India. However, a once-in-a-lifetime option allows two properties if the total LTCG does not exceed ₹2 crore.
If the 20%-with-indexation route pushes me into a higher surcharge bracket, what happens?
The unindexed gain is added to total income to determine the surcharge slab even when tax is ultimately paid at 20% on the indexed figure — a contested outcome that can raise surcharge on base income.
Do NRIs get the grandfathering indexation option on property?
No. The option to choose 20% with indexation for property bought before 23 July 2024 is restricted to resident individuals and HUFs.
Can I invest short-term gains or equity gains in 54EC bonds?
No. Section 54EC applies only to long-term gains from the transfer of land, building, or both.
How long must I hold a new property bought under Section 54 or 54F?
At least 3 years. Selling within 3 years withdraws the exemption and the gain becomes taxable in the year of that sale.
This article is for general information only and reflects our understanding of the rules at the time of writing. Tax and regulatory provisions change frequently and some references may be subject to further notification. It is not professional advice — please verify against the latest provisions, or consult a professional, before acting.