What amount must be invested in a residential house to claim an exemption for long-term capital gains?

If we sell our residential house for, say, ₹50 lakh, do we have to invest the full 50 lakh to buy another residential house property, or do we only need to invest the long-term capital gains? I was under the impression that only the capital gains amount needed to be invested in another residential house property, but confusion arose because my neighbour who had sold his shop was advised by his CA to use the entire sale proceeds to claim the full exemption from tax on long term capital gains.

There are two different provisions under the income tax laws where the exemption for the investment made in a residential house is available to an individual and a HUF. The first is under Section 54, and the other is under Section 54F. Section 54 applies to claiming an exemption from tax on long-term capital gains arising from the sale of a residential house, whereas Section 54F applies to claiming an exemption from payment of tax on long-term capital gains arising from the sale of a long-term capital asset other than a residential house.

Exemption Provisions Under Sections 54 and 54F for Capital Gains Tax on Property Sales

The taxpayer must invest only in long-term capital gains to claim an exemption under Section 54 for tax on long-term capital gains. In contrast, for claiming exemption under Section 54F, the sale consideration must be invested. So, the provision of section 54 is applicable in your case as you plan to sell a residential house, but section 54F applies to your neighbour as he had sold a commercial asset other than a residential house.

Since the benefit of indexation has practically been removed except for the computation of the tax liability of a resident individual and a HUF on the sale of land and buildings, you will have to invest the difference between the sale consideration and your cost of acquisition. If the house was bought before 1st April 2001, you can take the fair market value of the residential house as of 1st April 2001 as your cost. Please note that the fair market value as of 1st April 2001 cannot be higher than the stamp duty value of the property on that date.

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Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant on his X handle.

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