Section 54F: The little-known route to saving big on capital gains tax

A closer look at Section 54F, the legal tax strategy letting Indians cut capital gains tax by reinvesting sale proceeds into residential property

For many Indians, selling an asset, whether gold, a land, or a commercial property can trigger a hefty tax bill. But,

 

Section 54F, a lesser-known provision of the Income Tax Act, offers a legal route to cut that liability significantly.

 

This rule allows individuals to save tax on long-term capital gains (LTCG) by reinvesting the proceeds into a residential property within prescribed timelines.

Section 54F: The basics

Section 54F exists to encourage home ownership. It exempts LTCG on the sale of any long-term asset (other than a house) if the net sale proceeds are used to purchase or construct a residential property in India. The new property must be purchased within one year before or two years after the sale, or constructed within three years. Owners cannot hold more than one house on the date of transfer.

 

In a post on X, CA Nitin Kaushik dubbed this the “secret tax hack of the wealthy”, explaining how this provision helps convert volatile assets into stable real estate while saving significant tax. “If you sell gold, land or shares worth crores and reinvest in a house, you can legally pay zero tax on gains,” he wrote.

 

Real-life impact

Prakhar Agrawal, director of Rama Group, explains, “We are increasingly seeing salaried professionals and self-employed individuals leverage Section 54F. For example, Ashutosh Goyal sold a long-term asset for Rs 5 crore, generating Rs 2 crore in gains. By reinvesting Rs 3 crore in a residential villa within the timeline, he secured Rs 1.2 crore in exemptions, paying tax on only Rs 0.8 crore.”

 

A salaried individual sold a commercial shop for Rs 75,00,000 (held since 2010), with LTCG of Rs 50,00,000. By investing the full amount into a new house within two years, he avoided the tax entirely, otherwise, he would have paid Rs 10 lakh in tax at the flat 20 per cent LTCG rate.

 

What to watch out for

Amar Ranu, head, investment products & insights, Anand Rathi, cautions about common pitfalls, missing timelines, owning multiple houses, and failing to deposit unused proceeds in a Capital Gains Account Scheme (CGAS). He adds that the Rs 10 crore exemption cap introduced in April 2024 mainly affects high-value deals, not ordinary taxpayers.

 

Strategic takeaway

Ranu says, “If the goal is to buy a residential property, Section 54F can be a powerful tool. If reinvestment isn’t possible within timelines, CGAS or Capital Gain Bonds offer legal alternatives.”

 

Kaushik sums it up, “Think of it as saving tax today and building wealth tomorrow.”