A couple in Bengaluru sold their first flat in Indiranagar in 2026 to fund a larger home closer to their children's school. The sale left them with a healthy gain, and they were about to set aside a big chunk for tax when their chartered accountant stopped them. Because they were buying another home, most of that gain could be exempt from tax, if they followed a few rules on timing and reinvestment. They had been about to pay tax they did not owe. The exemption that saved them is one of the most useful, and most misunderstood, rules for anyone selling one home to buy another.

The short answer. When you sell a residential house you have held for more than 24 months and use the gain to buy or build another residential house, the long term capital gains can be exempt from tax under the rule long known as Section 54. You must buy the new home within 1 year before or 2 years after the sale, or construct it within 3 years, and the exemption is the lower of your gain or the amount you reinvest, capped at 10 crore rupees. The trade off is discipline. Miss the timeline or park the money in the wrong place, and the exemption slips away.

This exemption sits in the income tax law, as guides such as ClearTax explain. Because the tax code is being reorganised, confirm the current section reference and fine print with a tax advisor, but the substance below is what matters for planning.

What is capital gains tax on selling a home?

Capital gains tax is the tax on the profit you make when you sell a property for more than you paid. If you have held the home for more than 24 months, the gain is treated as long term, which is taxed differently from a short term gain on a property held for less time. For most homeowners selling a flat they have lived in for years, the gain is long term, and it is this long term gain that the Section 54 exemption can shelter when you reinvest in another home.

The gain itself is broadly the sale price less the indexed cost of buying and improving the home, though the exact computation is a matter for your accountant. What matters for planning is that a large gain does not automatically mean a large tax bill, because reinvesting in a new home can reduce or remove the tax entirely.

How does the Section 54 exemption work?

The exemption works by letting you set your capital gain against the money you put into a new residential house. If you reinvest an amount equal to or greater than your gain into the new home, the whole gain can be exempt. If you reinvest less, the exemption is limited to the amount you actually put in, and the remaining gain stays taxable. In short, the exemption is the lower of the capital gain or the sum reinvested in the new house, so the more of the gain you channel into the new home, the less tax you pay.

This is why the Bengaluru couple were advised to route their gain into the new flat rather than bank it. Money used to buy the next home does double duty, housing the family and sheltering the gain, while money left aside is simply taxed.

It is worth knowing a close cousin of this rule. Where Section 54 applies to the sale of a residential house, a related provision often called Section 54F applies when you sell some other long term asset, such as a plot of land or shares, and put the proceeds into a residential house. The conditions differ in the detail, and 54F usually looks at the whole sale value rather than only the gain, but the idea is the same, that reinvesting in a home can shelter what you make. If your sale is not of a house, ask your advisor whether this related exemption fits your case.

What are the timelines to reinvest?

The timelines are strict, and missing them is the most common way buyers lose the exemption. You can buy the new residential house within 1 year before the sale or within 2 years after it, or you can construct a new house within 3 years of the sale. These windows are measured from the date of the sale, so the clock starts the moment your old home changes hands. The table below sets out the core conditions in one place.

What is the Capital Gains Account Scheme?

The Capital Gains Account Scheme is a way to preserve the exemption when you have not reinvested the gain by the time your tax return is due. If you sell your home but have not yet bought or built the new one before the deadline for filing your return, you deposit the unused gain in a Capital Gains Account with a bank, and that deposit counts as reinvestment for now. You then use the money from that account to buy or build the new home within the allowed time. It is a bridge that keeps the exemption alive while you complete the purchase.

There is a catch to respect. If the money in the account is not used within the permitted period, it becomes taxable in the year that the three year window expires. So the scheme buys you time, but not an indefinite delay, and the underlying timelines still govern the outcome.

Is there a cap on the exemption?

Yes, the exemption is capped at 10 crore rupees of gain. Introduced in the 2023 budget, this ceiling means that if your long term capital gain exceeds 10 crore rupees, the exemption applies only up to that figure, and the excess is taxable even if you reinvest more. For the vast majority of home sellers the cap is far above their gain and never bites, but it matters for very large transactions. It is one more reason to have the numbers checked rather than assumed.

Because tax rules can be revised and the code is being reorganised, treat the cap and the timelines as the current framework and confirm the exact figures for your year with a tax advisor before you rely on them. The structure has been stable, but the details are worth verifying.

How should a Bengaluru seller and buyer plan this?

Plan by lining up the purchase and the sale so the reinvestment happens inside the window. If you are selling one Bengaluru home to buy another, work backward from the sale date to be sure the new purchase or construction falls within the two or three year limits, and keep the gain earmarked for the new home rather than spending it elsewhere. A project such as Purva Weaves in Yemlur is the kind of upgrade a family funds partly from the sale of an earlier flat, exactly the situation this exemption is built for. Since the purchase also brings its own tax steps, our guide to TDS on a property purchase and our guide to home loan tax benefits are worth reading alongside this one.

The overarching habit is to involve a tax advisor before the sale, not after. Many of the ways the exemption is lost, from missing a deadline to holding the money in the wrong place, are avoidable with a plan made in advance rather than a scramble at filing time.

What should you check before you sell?

Run through these seven steps so the exemption works for you rather than slipping away.

1. Confirm you have held the home for more than 24 months, so the gain is long term.
2. Estimate your capital gain with an accountant before you finalise the sale.
3. Plan the new purchase or construction to fall within the two or three year window.
4. Reinvest an amount at least equal to your gain to exempt it fully.
5. Use the Capital Gains Account Scheme if you cannot reinvest before filing your return.
6. Remember the exemption is capped at 10 crore rupees of gain.
7. Confirm the current rules and section reference with a tax advisor before you rely on them.

Do I pay tax if I sell my home to buy another?

Often not, if you plan it right. When you sell a residential house held over 24 months and reinvest the gain in another residential house within the allowed time, the long term capital gain can be exempt under the rule known as Section 54. The exemption is the lower of your gain or the amount you reinvest, so channelling the gain into the new home is what removes the tax.

How long do I have to buy the new home?

You can buy the new residential house within 1 year before the sale or within 2 years after it, or construct one within 3 years of the sale. These windows run from the date of sale. If you cannot reinvest before your tax return is due, you can deposit the gain in a Capital Gains Account Scheme account and use it to buy or build within the same time limits.

Is there a limit on the capital gains exemption?

Yes. Since the 2023 budget, the exemption is capped at 10 crore rupees of gain. If your long term capital gain is larger than that, the exemption applies only up to 10 crore rupees and the excess is taxable. For most home sellers the cap is well above their gain, but it matters for very large transactions, so have the figures checked.

What happens if I do not reinvest in time?

If you do not reinvest within the allowed window, the exemption is lost and the gain becomes taxable. If you had parked the money in a Capital Gains Account Scheme account and did not use it, that amount becomes taxable in the year the three year period expires. This is why the timelines matter so much, and why planning the reinvestment before the sale is the safest approach.

Last updated 2026-07-20. PropNewz Team.