NISM-Series-X-B: Investment Adviser (Level 2) · Capital Gains

Capital Gains Exemptions: Sections 54, 54F and 54EC

Updated 11 October 2026 · Fact-checked

These sections let you avoid tax on long-term capital gains by reinvesting. Section 54 covers gains on a residential house, 54F covers gains on other assets if the sale money goes into a house, and 54EC covers gains on land or building if you invest in specified bonds within 6 months. You check the asset, the time limit and the cap.

Understand Capital Gains Exemptions: Sections 54 to 54F and 54EC

A long-term capital gain is taxed when you sell the asset. The law gives relief if you put the gain, or the sale money, into a socially preferred asset. The relief is an exemption, not a deduction from price. You must meet the conditions of the section you claim.

Section 54 applies when the asset sold is a long-term residential house (building or land appurtenant to it). You reinvest the capital gain in another residential house in India. Section 54F applies when the asset sold is any other long-term asset, such as shares or a plot of land, but not a residential house. Here you must reinvest the net sale consideration, not just the gain, to get full relief.

Section 54EC applies only to long-term gains on land or building or both. You invest the gain in notified bonds, such as those of NHAI and RECL, within 6 months of the transfer. The bonds have a 5-year lock-in. The cap is ₹50 lakh per assessee.

If you cannot buy or build the house before your return is due, you deposit the unused amount in a Capital Gains Account Scheme account with a notified bank. You then use it within the allowed period. Any amount not used is taxed as long-term capital gain in the year the period ends.

In all cases the new asset has a lock-in. Break it and the exemption is reversed. Exam questions test who can claim, how much is exempt, the time limits and what happens on early sale.

Key formulas to remember

Section 54: asset and reinvestment: Sell: long-term residential house → Reinvest: capital gain in residential house in India; Buy 1 year before or 2 years after transfer, or construct within 3 years after transfer. Claimed by individual or HUF.
Section 54: limit: Exemption = lower of capital gain and cost of new house (cost counted up to ₹10 crore); If long-term gain is up to ₹2 crore, you may invest in two houses in India. This option is available once in a lifetime.
Section 54F: asset and reinvestment: Sell: long-term asset other than residential house → Reinvest: net consideration in one residential house; Individual or HUF. On the date of transfer you must not own more than one residential house other than the new one.
Section 54F: proportionate exemption: Exempt gain = Capital gain × Amount invested ÷ Net consideration; If the full net consideration is invested, the whole gain is exempt. Cost counted is capped at ₹10 crore.
Section 54F: further house: No other residential house bought within 2 years, or built within 3 years, after the transfer; If you do, the exemption is withdrawn and the gain becomes taxable as long-term gain.
Section 54EC: Sell: long-term land or building → Invest gain in notified bonds within 6 months of transfer; Maximum ₹50 lakh across the financial year of transfer and the next financial year. Lock-in 5 years.
Lock-in of new asset: New house: 3 years. 54EC bonds: 5 years; Sale of house within 3 years: the exemption is deducted from its cost when computing the gain, and that gain is short-term. Early exit from 54EC bonds: exempt gain is taxed as long-term gain in that year.
Capital Gains Account Scheme: Deposit unused amount before the due date of filing the return; Used for 54 and 54F. Unused balance at the end of the period is taxed as long-term gain of that year.

How to solve Capital Gains Exemptions: Sections 54 to 54F and 54EC questions

Use the same sequence for any question on these exemptions. It stops you mixing up the sections.

1Identify the asset sold. Is it a residential house, land or building, or some other asset such as shares?
2Confirm the gain is long-term. These sections apply to long-term gains only.
3Pick the section. Residential house sold → 54. Other asset sold, money into a house → 54F. Land or building sold, money into bonds → 54EC.
4Check who is claiming. Sections 54 and 54F are for individuals and HUFs. Section 54EC has no such restriction, apart from the ₹50 lakh cap.
5Check the time limits: 54 and 54F house purchase 1 year before or 2 years after, construction 3 years; 54EC bonds within 6 months.
6Find the base for reinvestment: capital gain for 54 and 54EC, net consideration for 54F.
7Compute the exemption: lower of gain and investment (54, 54EC with cap), or the proportion formula (54F).
8Check the lock-in and any later events, such as an early sale or purchase of another house, then state the taxable gain.

Quickest way: Three-question filter

When to use it: Use it for MCQs where options mix up sections, limits or time periods.

Ask what was sold. House → 54. Land or building to bonds → 54EC. Anything else → 54F.
Ask what must be reinvested. Gain (54, 54EC) or full net consideration (54F).
Ask the number to match: 6 months and ₹50 lakh for 54EC, 2 or 3 years and 3-year lock-in for houses, 5 years for bonds.
Eliminate any option that applies the wrong base or the wrong period.

Common mistakes in Capital Gains Exemptions: Sections 54 to 54F and 54EC

Applying Section 54 to the sale of shares or a plot of land.
The words 'reinvest in a house' appear in both 54 and 54F.
Fix: Section 54 needs a residential house as the asset sold. Any other long-term asset uses 54F.
Using only the capital gain as the amount to reinvest under 54F.
Students copy the 54 rule.
Fix: For full 54F relief, reinvest the net sale consideration. A smaller investment gives a proportionate exemption.
Using 54EC for gains on shares or gold.
Students think bonds are available for any asset.
Fix: 54EC works only for long-term gains on land or building or both.
Forgetting the ₹50 lakh cap and the 6-month limit for 54EC.
Students remember the bonds but not the limits.
Fix: Tie them together: 6 months from transfer, ₹50 lakh in total across the transfer year and the next year, lock-in 5 years.
Ignoring the ownership condition in 54F.
Students focus on the reinvestment and skip the conditions on the assessee.
Fix: Check that you own no more than one other residential house on the transfer date, and that you do not buy or build another within the stated periods.
Thinking unused money in the Capital Gains Account Scheme stays exempt.
The deposit feels like a final investment.
Fix: The deposit only preserves the claim. Money not used for the house in time is taxed as long-term gain in the year the period ends.

Worked examples

Example 1

Meera, a resident individual, sells a plot of land held for 4 years. Net sale consideration is ₹1,00,00,000 and the long-term capital gain is ₹40,00,000. She buys a residential house for ₹60,00,000 within the allowed time and meets all other conditions. What is exempt under Section 54F and what is taxable?

Show the solution

The asset sold is land, not a residential house, so Section 54F applies.
The gain is long-term, so the section can be used.
The exemption is proportionate because only part of net consideration was invested.
Exempt gain = ₹40,00,000 × ₹60,00,000 ÷ ₹1,00,00,000.
Exempt gain = ₹24,00,000.
Taxable long-term gain = ₹40,00,000 − ₹24,00,000 = ₹16,00,000.

Answer: ₹24,00,000 is exempt and ₹16,00,000 is taxable as long-term capital gain. Meera must keep the new house for 3 years.

Example 2

Rohit sells land on 10 January 2025 (financial year 2024-25) at a long-term capital gain of ₹80,00,000. He invests ₹30,00,000 in notified 54EC bonds on 20 February 2025 and ₹30,00,000 on 10 April 2025. How much gain is exempt under Section 54EC?

Show the solution

Land is eligible, and the gain is long-term.
Both investments fall within 6 months of 10 January 2025, which ends on 10 July 2025.
The total invested is ₹30,00,000 + ₹30,00,000 = ₹60,00,000, spread across the transfer year and the next year.
The cap for these two years together is ₹50,00,000.
Exemption = lowest of gain ₹80,00,000, investment ₹60,00,000 and cap ₹50,00,000 = ₹50,00,000.
Taxable gain = ₹80,00,000 − ₹50,00,000 = ₹30,00,000.

Answer: ₹50,00,000 is exempt and ₹30,00,000 is taxable. If Rohit takes a loan against the bonds or transfers them within 5 years, the exempt gain is taxed as long-term gain in that year.

Exam tips

Match the asset to the section first. Most wrong options swap 54 and 54F.
Memorise the numbers as pairs: 6 months with ₹50 lakh and 5 years for 54EC; 1 year before, 2 years after, 3 years to construct for houses.
Look for 'net consideration' in the question. It signals 54F and a proportionate exemption.
A question on early sale usually asks about reversal. Know that the lock-in is 3 years for the house and 5 years for bonds.
Read whether the gain is long-term. Short-term gains get none of these exemptions.

Practice questions from Capital Gains

Capital Gains Exemptions: Sections 54 to 54F and 54EC: frequently asked questions

What is the difference between Section 54 and Section 54F?

Section 54 applies when you sell a residential house and reinvest the capital gain in another house. Section 54F applies when you sell any other long-term asset and reinvest the net sale consideration in a house. 54F also has an ownership condition on other residential houses.

What are the conditions for the Section 54EC bonds exemption?

The gain must be long-term gain on land or building. You must invest in notified bonds within 6 months of the transfer, up to ₹50 lakh across the transfer year and the next year. The bonds have a 5-year lock-in and you cannot take a loan against them.

How can I save capital gains tax on the sale of property?

You can reinvest in a residential house under Section 54, or invest in notified bonds under Section 54EC. For an asset other than a house, Section 54F applies. You must meet the time limits, caps and lock-in periods of the section you choose.

What is the Capital Gains Account Scheme?

It is a deposit account with a notified bank for money you cannot yet use to buy or build a house. You deposit before the return due date to keep the exemption. Any amount not used within the allowed period is taxed as long-term capital gain.