20 Apr 2020

Capital gain tax and reinvestment (into residential property)

I just came across something interesting: apparently if you sell some long-term asset, such as shares/mutual funds or house, and put that money into buying a residential house property, you don’t have to pay capital gain taxes on the sale. Quoting ClearTax article on Capital Gains with some edits:
Exemption under Section 54F is available when there are capital gains from the sale of a long-term asset other than a house property. You must invest the entire sale [proceedings] to buy a new residential house property to claim this exemption.
Making it apply only to residential property is limiting: you’d still have to pay capital gain taxes when switching from one mutual fund scheme to another or while rebalancing your portfolio by selling equity/debt shares and buying the other. However, I think I should still be happy about this exemption for these reasons:
  1. This is better than nothing. Governments usually subsidise only some kinds of investment; investing in residential properties is a popular one.
  2. This can actually be useful to me. I have been toying with the idea of selling some equity shares and putting that money into buying a house. Saving some tax in the process only makes the idea more attractive.
  3. While some of us might be unhappy that for some capital reinvestment there is no tax break, we should keep in mind what Aashish Somaiya of Motilal Oswal Asset Management Company said in a recent interview: “tax is a happy incidence; you have tax when you have a return”. Rather than fretting about the 20% tax, one should be happy that their investments have made them the remaining 80%.
PS: This is no tax advice. Neither am I qualified to provide tax advice. Even if I were to take advantage of this scheme, I’d consult a professional tax advisor before executing the plan.
Update (1 May 2020): I was re-reading information on this topic and was dismayed to see mentions of “new residential house property” in ClearTax:
A new residential house property must be purchased or constructed to claim the exemption
This was a shock to me because the house we were considering to buy was not a new construction. Worried if I might not be able to take advantage of this tax exemption, I decided to read the actual text of the law itself, rather than interpretations of it, to see for myself what restrictions apply. Going through the text of Section 54F of the Income Tax Act, it’s clear that the exemption applies to both newly constructed and old houses. Phew!


  1. Woow!!
    This was completely new info which I got to know. Awesome blog!!

  2. Have one confusion regarding this, read in few threads that its valid only once in a lifetime and at some places twice in a lifetime, but reading the text of incometax act (same as linked in the article), I understand the clause is the assesse can have at max 1 other property when claiming this section.
    Hence, I can understand why some people said twice , but regarding the lifetime part - if I sell a property I assume I can claim this again. Albeit while selling as well there are some rules around if sold less than x years ( I vaguely remember 3) then this exemption has to be paid back.

    Do you think my understandings are correct? especially the applicable to max 2 properties, I dont intended on buying more than that.

    Thank you!!!

    1. You're right. The text of the law states that (i) there can be a maximum of 1 other house that the taxpayer owns, and (ii) they must hold onto this newly bought house for at least 3 years. I also believe that there is no lifetime limit.