Section 54 Exemption: Can You Use Capital Gains From Two Floors To Buy One House?

Tax professionals say Section 54 does not restrict combining capital gains from more than one sale for reinvestment in a single new house.

Selling property often brings up questions on how to save tax on long-term capital gains. One such situation concerns whether the gains from selling two different residential units can be combined to buy a single property and still enjoy the exemption under Section 54 of the Income Tax Act.

The Case

A taxpayer constructed a stilt plus four-storey building and later sold two of the floors to different buyers. The proceeds from both sales were placed into separate Capital Gains Accounts with a public sector bank. The key question: can these amounts together be used to purchase one new house without losing the Section 54 benefit?

What the Law Provides

Section 54 gives relief from long-term capital gains tax to an individual or Hindu Undivided Family (HUF) if the gains from selling a residential house are reinvested in another residential house in India.

The new property must be bought within two years of the sale, or within one year before the sale.

If the taxpayer opts for construction or an under-construction property, the window extends to three years.

A special one-time benefit also allows exemption when gains from the sale of one house (up to Rs 2 crore) are invested in two houses, though this option can be used only once in a lifetime.

What Expert Says

Tax professionals say Section 54 does not restrict combining capital gains from more than one sale for reinvestment in a single new house. As long as the original assets were residential units and the timelines are met, the exemption can be claimed.

According to Moneycontrol‘s Ask Wallet Wise, since the gains from the two floors were already parked in capital gains accounts, they qualify as long-term residential property gains. The law allows the taxpayer to use both deposits for the purchase of one new residential property in India and still enjoy full exemption.

So, yes, capital gains from the sale of two different floors can be consolidated and invested into a single residential house to claim Section 54 exemption. The critical factors remain: the property sold must be residential, the reinvestment must be made within the prescribed timelines, and the purchase or construction should be in India.