My mother owns two residential properties. She sold one of them for ₹55 lakhs. She plans to buy another house at ₹94 lakhs using the sale proceeds from her second property. The Income Tax officer has told us that she is not eligible to claim exemption under Section 54/54F in this situation and that she would need to invest the capital gains in government bonds under Section 54EC instead. I want to understand: Why the IT officer considers her ineligible for a Capital Gains Account in this scenario. Whether the fact that she still owns another house affects her eligibility under Sections 54 or 54F. What are the exact conditions for claiming exemption if she wants to reinvest in a new residential property. Whether investing in 54EC bonds is the only alternative to save tax on the capital gains. If there is any legal interpretation or precedent that might allow her to use the capital gains to buy a new house instead of 54EC bonds, despite owning another property. I want to confirm the correct course of action to minimize capital gains tax and comply with the law
1) Exemption under Section 54 is allowed only for investment in one house property.
2) However, the exemption can be claimed for the purchase or construction of 2 house
properties if the amount of long-term capital gains does not exceed Rs. 2 crores.
3) This
option can be availed once in a lifetime, i.e. once this option is claimed, it cannot be
further availed for the same or any succeeding financial year
The Income Tax officer is correct in stating that your mother is ineligible for exemptions under Sections 54/54F, and here's why.
Section 54F has a strict condition: The taxpayer should not own more than one residential house on the date of sale of the capital asset, other than the new property being purchased for reinvestment. Since your mother still owns another residential property after selling one, she fails this eligibility test.
Section 54 is also not applicable because it only covers the sale of residential property where the entire sale proceeds are reinvested in another residential property - but the multiple property ownership restriction applies here too.
The ownership of another residential property is a complete disqualification for Section 54F benefits. Recent court precedents have clarified that:
Multiple floors of the same building count as one house
Completely separate residential properties count as multiple houses
Joint ownership can have nuances, but doesn't generally overcome this restriction
Given the disqualification from Sections 54/54F, Section 54EC bonds are indeed the primary tax-saving option available. Key features include:
Maximum investment: ₹50 lakh per financial year
Time limit: Must invest within 6 months of property sale
Lock-in period: 5 years mandatory holding
Eligible bonds: NHAI, REC, IRFC, PFC bonds
There are no legal precedents or interpretations that would allow circumventing the "more than one residential house" restriction for Section 54F. The courts have consistently upheld this condition as mandatory for eligibility.
Recent judicial clarifications have only related to what constitutes "one residential house" (multiple floors vs. separate properties), not to exempting taxpayers who own multiple distinct properties.
@Shubham Goyal, thank you for the detailed clarification. The house that was sold was gifted to my mother by my grandfather in 2020, and we sold it in 2025. For calculating long-term capital gains, should we consider the indexed cost of acquisition based on the grandfather’s acquisition cost, or should it be based on the valuation in 2020 when my mother received it as a gift? How exactly should the capital gain be computed in this scenario?
Fir calculating long term capital gain you will have to consider grandfather acquisition costs
2) Where an asset is acquired by gift, the period of holding shall be reckoned from the date when the previous owner had acquired such asset. Thus, the period of holding in the hands of the donor shall also be included while computing the period of holding in the hands of the donee,”
Use the grandfather's acquisition cost, not the 2020 gift valuation - this is the correct legal approach under Section 49(1) of the Income Tax Act.
Grandfather's purchase cost becomes your mother's cost of acquisition for capital gains calculation. The 2020 gift has no bearing on cost computation.
Indexation benefit is available from the grandfather's purchase year, not from 2020. This significantly reduces taxable gains.
Sale Price (2025): ₹55 lakhs
Less: Indexed Cost of Acquisition
= Grandfather's cost × (CII of 2025/CII of grandfather's purchase year)
Example: If grandfather bought for ₹10 lakhs in 2010:
Indexed cost = ₹10 lakhs × (397/167) = ₹23.77 lakhs
Capital gains = ₹55 lakhs - ₹23.77 lakhs = ₹31.23 lakhs
If purchased before April 1, 2001: Your mother can choose between:
Grandfather's actual cost (with indexation from 2001)
Fair Market Value as on April 1, 2001 (whichever is higher)
Two calculation methods:
20% with indexation (using indexed cost from grandfather's purchase year)
12.5% without indexation (using grandfather's actual cost)
Choose the method that results in lower tax liability.
The holding period includes grandfather's ownership, so it's definitely long-term capital gains eligible for these preferential rates.
The Income Tax officer's interpretation is based on Section 54/54F's specific requirements about the number of residential properties owned at the date of sale. Exemption under Section 54 applies only to capital gains from sale of a residential house when invested in another residential property—there is no restriction on owning more than one property under Section 54, but Section 54F (for non-residential assets) requires that at the time of sale, the assessee should not own more than one residential house (excluding the new house).
Your mother is eligible to claim exemption under Section 54 if she is reinvesting capital gains from the sale of her residential property into another residential house within one year before or two years after the sale, regardless of whether she still owns a second residential house. Ownership of multiple residential houses only affects eligibility under Section 54F, which is for capital gains on assets OTHER THAN a residential property.
If exemption under Section 54 is to be claimed:
Investment should be in one new residential property (or two under special circumstances where the gain doesn't exceed 2 crores, available once in a lifetime).
The purchase should be within 1 year before or 2 years after sale (or construction within 3 years), and any unutilized amount should be deposited in a Capital Gains Account Scheme before the due date of filing the return.
The exemption is allowed up to the capital gains amount used for purchase/construction.
If the officer insists on Section 54EC bonds:
These are government-specified bonds with a 5-year lock-in and a Rs. 50 lakh per financial year cap.
54EC bonds are only required if you do not plan to reinvest in residential property or fail conditions under 54/54F.
Legal precedents have affirmed Section 54's availability even in cases of multiple property ownership unless the facts bring the case under Section 54F, where only one house can be owned at sale time. Registration and purchase of a new house in your mother's name should ensure she qualifies.
For minimizing tax:
Reinvest the sale proceeds in one eligible residential house in her name and deposit unused gains in Capital Gains Account within the required timeframe.
Section 54EC is an alternative only if you do not fulfill Section 54/54F conditions.
If you need further clarity, professional tax advice or consultation can be provided.
Dear Client,
Your mother is eligible to claim exemption under Section 54 since she has sold a residential house and is reinvesting the gains in another residential property, and the fact that she already owns another house does not affect her eligibility under this section (it only restricts Section 54F), so the Income Tax Officer’s objection appears misplaced; for computing long-term capital gains, because the property was received by gift, the cost of acquisition will be your grandfather’s original purchase price with indexation from the year he acquired it, not the market value in 2020, and therefore she should calculate the gain accordingly, reinvest the capital gain portion into the new house within the prescribed timelines (or deposit it into a Capital Gains Account if purchase is delayed), while any balance can also be saved through investment in 54EC bonds if needed, ensuring full compliance and optimal tax saving.
I hope this answer helps. For any further queries please do not hesitate to contact us. Thank you.
You may please note that as far as section 54 of IT act is concerned, there is no restriction on owning any number of houses before the sale. She can still claim exemption as long as she buys another residential house within the prescribed time limit.
However there is a restriction under section 54F that the assessee should not own more than one residential house (other than the new one) at the time of sale. .
Your sold a house but she will not be disqualified to claim exemption under section 54, even though she owns another house, the IT Officer's objection is incorrect in law or perhaps he has not interpreted the applicable provisions of law in this regard.
Please note that even if your mother had spent more than the capital gain towards the purchase of new house, the excess is not relevant for exemption and it cannot harm her claim as wrongly informed by the officer..
As long as she invests the capital gains in the new house within the timeline, she is eligible.
Probably the IT Officer is mixing up section 54F with section 54. If she has sold a residential property, then she need not go for 54 EC bonds unless she does not wants to buy a house.
Under Section 49(1) of the Income-tax Act:
If a property is acquired by way of gift, will, inheritance, or other specified modes, then for the purpose of calculating capital gains:
Cost of acquisition = Cost to the previous owner (your grandfather, in this case).
Please note that even though your mother held it only from 2020 to 2025, if your grandfather held it long term, the property will qualify as a long term capital asset.
The indexation will be applied from the year in which your mother actually received the property (2020-21) and not from when your grandfather acquired it.
This was clarified in multiple rulings, for example in Manjula J Shah Vs. DCIT Bombay HC, affirmed by supreme court in various other cases.
Use your grandfather's acquisition cost as cost of acquisition, apply indexation benefit from 2020-21, compute capital gains using that indexed cost, the entire gain can be exempt under section 54 if reinvested in the new house..
For long term capital gain she has to invest the amount within 2 years to buy another residential house or 3 yrs if she constructs another. Else she needs to invest the same in capital gain bonds.
