Taxation · Capital Gains

Exemption on Reinvestment in House Property and Assets (Capital Gains)

Q: Can I claim exemption on shares if I buy a new house?

Yes, if the shares are a long-term asset and you are an individual or HUF. Reinvesting the full net consideration in a residential house within the time limit gives full exemption of the gain; reinvesting less gives a proportionate exemption. The amount must be invested, or deposited in the capital gains account, before the return due date. The cost of the new house counts only up to ₹10 crore, and you must not own more than one other residential house on the transfer date.

Q: What is the capital gains account scheme?

It is a special bank account where you deposit unused sale money before the due date of filing your return. You can then use it for the new asset within the time limit. If you do not use it, the unused amount is treated as capital gain of the year in which the time limit expires. For the house reliefs it is long-term capital gain; for agricultural land its nature follows the original gain.

Q: Does exemption apply on sale of agricultural land?

Yes, for a capital gain, short-term or long-term, on urban agricultural land. Rural agricultural land is not a capital asset. The relief is only for an individual or HUF, and the land must have been used for agriculture by the individual or his parent (or by the HUF) for at least two years before the transfer. You must buy other agricultural land within two years after the transfer and hold it for three years; the exemption is the lower of the gain and the cost of the new land.

Q: What happens if I sell the new house within three years?

The exemption is taken back. Under the house-sale relief, the cost of the new house is reduced by the exemption claimed when computing the gain on it. Under the other-asset relief, the exempted gain is taxed as long-term capital gain of the year in which the new house is transferred, or in which the other residential house is purchased or constructed. Under the other-asset relief, buying another residential house within two years, or constructing one within three years, after the transfer (other than the new house) also withdraws the exemption.

Updated 5 October 2026 · Fact-checked

These reliefs exempt capital gain if you reinvest in a new residential house (long-term gain), or in agricultural land after selling urban agricultural land (short- or long-term gain), within fixed time limits. The exemption is the lower of gain and cost of the new asset, or a proportion for other assets. Unused money goes to the capital gains account scheme before the due date.

Understand Exemption on Reinvestment in House Property and Assets

The law taxes capital gain when you sell an asset. But it gives relief if you put the money back into a home or farmland. The idea is simple: if you reinvest, you have not really cashed out, so the gain is exempt, fully or partly.

There are three main reliefs you must know. First, sale of a residential house: the gain is long-term, and you buy or build another residential house in India. Second, sale of any long-term asset other than a residential house (shares, land, gold and so on): you buy or build a residential house. Third, sale of urban agricultural land, where the capital gain may be short-term or long-term: you buy other agricultural land. Rural agricultural land is not a capital asset, so no capital gain arises on it.

All three reliefs are for individuals and HUFs only. The agricultural land relief also needs the old land to pass the usage test: it must have been used for agricultural purposes by the individual or his parent (or by the HUF) for at least 2 years before the transfer. The first house relief needs the old asset to be a residential house whose income is taxed under house property. The second needs the old asset to be a long-term capital asset that is not a residential house. In the first relief you reinvest only the capital gain to get full exemption. In the second relief, full exemption needs the net consideration, not just the gain, to be reinvested. If you reinvest less than the net consideration, you get a proportionate exemption.

Timing matters. The same windows apply to both house reliefs: you may buy one year before or two years after the transfer, or construct within three years after the transfer. For agricultural land, you buy within two years after the transfer. The cost of the new house counts only up to ₹10 crore in both house reliefs. The new asset has a lock-in of three years, counted from the date you acquire it. If you sell it earlier, the exemption is taken back. Under the other-asset relief, the exemption is also taken back if you buy another residential house (other than the new house) within two years, or construct one within three years, after the transfer.

Sometimes you will not have invested by the due date of filing your return. Then you deposit the unused amount in a bank under the capital gains account scheme before that due date. You can then use it within the time limit counted from the date of transfer. For a house, that is 2 years if you purchase and 3 years if you construct. For agricultural land, it is 2 years. The amount must actually be invested, or deposited in the capital gains account, before the due date. If it is neither, you get no exemption on that portion. Whatever is unused when the time limit ends is treated as capital gain of the year in which that time limit expires. For the house reliefs, that gain is long-term. For agricultural land, its nature (short-term or long-term) follows the original gain.

Key rules to remember

Exemption on sale of residential house: Exempt = lower of (LTCG, cost of new house); taxable LTCG = LTCG − exempt; Individual or HUF only. Cost of new house counts only up to ₹10 crore. The amount invested includes amount deposited in the capital gains account.
Time limit for new house (both house reliefs): Purchase: 1 year before to 2 years after transfer; Construction: within 3 years after transfer; Same windows for both house reliefs. Construction time is counted from the date of transfer, not from the start of work. The same periods (2 years for purchase, 3 years for construction, from transfer) are the time limit for using money kept in the capital gains account.
Exemption on sale of other long-term asset: Exempt = LTCG × (Cost of new house ÷ Net consideration), if cost of new house < net consideration; otherwise full LTCG; Net consideration is sale price less expenses on transfer. Full exemption needs the net consideration to be reinvested; reinvesting less gives a proportionate exemption. The amount must actually be invested before the due date of the return, or deposited in the capital gains account by then; otherwise no exemption on that portion. Cost of new house counts only up to ₹10 crore here too. Old asset must not be a residential house. Individual or HUF only.
Condition on assessee's holdings for other-asset relief: On the date of transfer, assessee owns no more than one residential house other than the new house; If he owns more, this exemption is not available. Do not apply it blindly to every sale of shares.
Lock-in of new asset: New asset not transferred within 3 years of purchase or construction; The 3 years run from the date of acquisition of the new asset. If transferred earlier under the house-sale relief, cost of new house is reduced by the exemption already claimed, and gain on it is computed on that reduced cost. The nature of that gain depends on the holding period of the new house (under 24 months is short-term). Under the other-asset relief, the exempted gain becomes LTCG of the year in which the new house is transferred, or in which the other residential house is purchased or constructed. Under the other-asset relief, buying another residential house (other than the new house) within 2 years, or constructing one within 3 years, after the transfer also withdraws the exemption.
Second house option: If LTCG on old house does not exceed ₹2 crore, assessee may invest in two residential houses in India; Applies to the house-sale relief only. The ₹2 crore limit is on the gain on the old house. It is a separate test from the ₹10 crore cap on the cost of the new house, so check both. Available once in a lifetime. Do not assume it for a larger gain.
Exemption on agricultural land: Exempt = lower of (capital gain, cost of new agricultural land); For capital gain, short-term or long-term, on urban agricultural land. Rural agricultural land is not a capital asset. Individual or HUF only. The old land must have been used for agricultural purposes by the individual or his parent (or by the HUF) for at least 2 years before transfer. New land bought within 2 years after transfer and held for 3 years.
Capital gains account scheme: Deposit before due date of return; use within the time limit; unused amount is treated as capital gain of the year in which the time limit expires; Deposit the unutilised amount (not the whole sale price) in an authorised bank account. Exemption is claimed on the amount deposited plus the amount already invested. The time limit runs from the date of transfer: 2 years if the house is purchased, 3 years if it is constructed, and 2 years for agricultural land. The unused amount is taxed in the year that period expires. For the house reliefs it is long-term; for agricultural land its nature follows the original gain.

How to solve Exemption on Reinvestment in House Property and Assets questions

Use this order for any question. It helps you pick the right relief first, then test the conditions, then compute.

1Identify the assessee. For all three reliefs, check that it is an individual or HUF. If it is a company or firm, state that these reliefs are not available.
2Identify the old asset. Is it a residential house, urban agricultural land, or any other long-term asset? This decides which relief applies.
3Compute the gain first and confirm its nature. The house reliefs need a long-term gain, so a short-term gain on a house or another asset gets no exemption under them. The agricultural land relief applies to a short-term or a long-term gain. For agricultural land, also check that the land is urban (rural agricultural land is not a capital asset) and that the 2-year usage test is met.
4Check the time limit for the new asset: purchase window, construction window, or land purchase window. Use the dates in the question.
5Compute the exemption. For house sale and agricultural land, take the lower of gain and cost of the new asset. For other assets, use the proportion on net consideration. Apply the ₹10 crore cap on the cost of a new house.
6Look at the capital gains account. If the money was not used before the return due date, the amount deposited counts as investment. Any amount neither invested nor deposited by the due date gets no exemption. Unused money after the time limit is taxable.
7Apply the lock-in and holding conditions. Check if the new asset was sold within three years of its acquisition, and whether the assessee owns more than one other house.
8Write the taxable gain: capital gain less exemption. State the head, the year of taxability for any withdrawal, and the final answer.

Quickest way: Four-line check for MCQs and written answers

When to use it: Use this when you have two minutes for a question and need to pick the relief and compute the exemption quickly.

Ask: what was sold? House means gain is reinvested. Any other long-term asset means net consideration is reinvested. Urban farmland means farmland is bought.
Ask: who sold? For all three reliefs, only an individual or HUF qualifies; any other person gets no exemption under them.
Compute in one line. House sale: lower of gain and cost. Other assets: gain × cost ÷ net consideration, capped at the gain.
For MCQs, test the options. Eliminate any answer greater than the gain. Eliminate any option that ignores the rule that cost cannot exceed the limit. There is no negative marking, so always attempt.
For written answers, structure it as: relief and section name in words, condition check, working, taxable balance. Each part earns step marks.

Common mistakes in Exemption on Reinvestment in House Property and Assets

Applying these reliefs to a company or firm.
Students remember the rule but forget the assessee condition.
Fix: Always state first that these reliefs are only for individuals and HUFs. If the assessee is any other person, the answer is nil exemption.
Using the gain, not net consideration, for investment in the other-asset relief.
Students mix up the house-sale relief with the other-asset relief.
Fix: Remember: house sale needs the gain reinvested; other assets need the net consideration reinvested for full exemption. If less is reinvested, use the proportion formula.
Claiming exemption when the new house was bought outside the time window.
Students ignore dates in the question or count construction time from the start of work.
Fix: List the transfer date and compute the earliest and latest dates before you decide. Purchase: 1 year before to 2 years after. Construction: within 3 years after transfer.
Ignoring the capital gains account scheme deposit date.
Students think any deposit later is also fine.
Fix: The deposit must be made before the due date of filing the return for that year. A later deposit does not count as investment.
Missing the lock-in and the holding of more than one house.
Students stop after computing the exemption.
Fix: Always check the three-year lock-in. For the other-asset relief, also check that the assessee does not own more than one residential house other than the new one on the transfer date.
Allowing cost of new house above ₹10 crore or treating the gain as exempt in full when cost is lower.
Students forget the cap and the lower-of rule.
Fix: Take cost of the new house only up to ₹10 crore, then apply lower-of or the proportion.

Worked examples

Example 1

Mr. Arjun (resident individual) sold a residential house on 15 August 2026. Long-term capital gain was ₹80,00,000. He bought a new residential house in India on 10 November 2026 for ₹50,00,000. (a) Compute the exemption and taxable gain. (b) He sold the new house on 20 September 2028 for ₹70,00,000. Compute the capital gain on this sale.

Show the solution

Assessee is an individual. Old asset is a residential house and gain is long-term, so the house-sale relief applies.
Purchase was within two years after transfer, so the time condition is met.
Exemption = lower of gain (₹80,00,000) and cost of new house (₹50,00,000) = ₹50,00,000. Taxable LTCG = ₹80,00,000 − ₹50,00,000 = ₹30,00,000.
The 3-year lock-in runs from the date of acquisition, 10 November 2026, so it ends on 10 November 2029. The sale on 20 September 2028 is within it, so the lock-in is broken.
Cost of the new house is reduced by the exemption claimed: ₹50,00,000 − ₹50,00,000 = nil.
The nature of the gain is decided by the holding period of the new house. From 10 November 2026 to 20 September 2028 is about 22 months, which is under 24 months for house property, so the gain is short-term. The lock-in only requires the cost to be reduced by the exemption claimed. Gain = ₹70,00,000 − nil = ₹70,00,000.

Answer: (a) Exempt ₹50,00,000; taxable LTCG ₹30,00,000. (b) The new house was held for about 22 months, which is under 24 months, so the gain is short-term. The lock-in only reduces the cost. Short-term capital gain on sale of new house = ₹70,00,000 (cost taken as ₹50,00,000 − ₹50,00,000 = nil).

Example 2

Ms. Meera (resident individual) sold listed equity shares held for three years on 10 June 2026. Net consideration was ₹40,00,000 and long-term capital gain was ₹25,00,000. She owns one residential house. On 15 February 2027 she bought another residential house in India for ₹32,00,000 using the sale money. Compute the exempt and taxable long-term capital gain.

Show the solution

Assessee is an individual. Old asset (shares) is a long-term asset other than a residential house, so the other-asset relief applies.
Meera owns one house on the transfer date, which is within the allowed limit of one other house.
The new house was bought within two years after transfer, so the time condition is met.
Cost of new house (₹32,00,000) is well below the ₹10 crore cap, so the full cost counts.
The ₹32,00,000 was actually invested in the new house on 15 February 2027, before the return due date, so it counts as investment. Any part of the net consideration neither invested nor deposited in the capital gains account by the due date would get no exemption.
Cost of new house (₹32,00,000) is less than net consideration (₹40,00,000), so the exemption is proportionate.
Exemption = ₹25,00,000 × ₹32,00,000 ÷ ₹40,00,000 = ₹20,00,000.
Taxable LTCG = ₹25,00,000 − ₹20,00,000 = ₹5,00,000.
She must not sell the new house within 3 years. She must not buy another residential house within 2 years or construct one within 3 years after the share transfer. Otherwise the exempted gain becomes taxable.

Answer: Exempt LTCG ₹20,00,000; taxable LTCG ₹5,00,000 (taxed at the special rate for long-term gain on listed shares).

Exam tips

Read the assessee first. The examiner often gives a company or firm to test whether you know the house reliefs are only for individuals and HUFs.
Compute capital gain before applying the exemption. Many questions give net consideration and cost data, and marks are given for the gain working.
Write dates in a small timeline. Time limits are the most common trap.
If money is unused at the due date of return, say clearly that it should go into the capital gains account scheme. State what happens to unused money when the time limit ends.
In MCQs, the wrong options usually apply the proportion to the wrong figure or ignore the lower-of rule. Check which relief applies before computing.

Practice questions from Capital Gains

Exemption on Reinvestment in House Property and Assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Exemption on Reinvestment in House Property and Assets: frequently asked questions

Can I claim exemption on shares if I buy a new house?

Yes, if the shares are a long-term asset and you are an individual or HUF. Reinvesting the full net consideration in a residential house within the time limit gives full exemption of the gain; reinvesting less gives a proportionate exemption. The amount must be invested, or deposited in the capital gains account, before the return due date. The cost of the new house counts only up to ₹10 crore, and you must not own more than one other residential house on the transfer date.

What is the capital gains account scheme?

It is a special bank account where you deposit unused sale money before the due date of filing your return. You can then use it for the new asset within the time limit. If you do not use it, the unused amount is treated as capital gain of the year in which the time limit expires. For the house reliefs it is long-term capital gain; for agricultural land its nature follows the original gain.

Does exemption apply on sale of agricultural land?

Yes, for a capital gain, short-term or long-term, on urban agricultural land. Rural agricultural land is not a capital asset. The relief is only for an individual or HUF, and the land must have been used for agriculture by the individual or his parent (or by the HUF) for at least two years before the transfer. You must buy other agricultural land within two years after the transfer and hold it for three years; the exemption is the lower of the gain and the cost of the new land.

What happens if I sell the new house within three years?

The exemption is taken back. Under the house-sale relief, the cost of the new house is reduced by the exemption claimed when computing the gain on it. Under the other-asset relief, the exempted gain is taxed as long-term capital gain of the year in which the new house is transferred, or in which the other residential house is purchased or constructed. Under the other-asset relief, buying another residential house within two years, or constructing one within three years, after the transfer (other than the new house) also withdraws the exemption.