Tax Exemption Under Section 54 and Section 54F - Tax Saving Guide

"Ankur, I just sold my property in Pune for ₹1.2 crores. The buyer deducted a large amount as TDS,, and now I'm panicking about the capital gains tax. Someone mentioned Section 54 and 54F - can these really help me save lakhs in taxes?"

This was Priya from Dubai on our customer support call last month. She had made a ₹60 lakh profit on her property sale but was staring at a massive tax bill.

If you're an NRI who has sold or is planning to sell property, shares, or other investments in India, you're probably facing the same question: How can you legally minimize your capital gains tax?

The answer lies in understanding Section 54 and Section 54F of the Income Tax Act - two powerful provisions that can help you save significant money if you know how to use them correctly.

By the end of this guide, you'll know:

• Exactly when and how to use Section 54 vs Section 54F
• Step-by-step process to claim these exemptions as an NRI
• How to use CGAS (Capital Gains Account Scheme) to buy yourself time
• Common mistakes that cost NRIs lakhs in unnecessary taxes
• Real calculation examples showing potential savings

Let's dive in.

Understanding Capital Gains Tax for NRIs First

Before we jump into exemptions, let's quickly understand what you're trying to save tax on:

Note: Holding Period for Long-Term Capital Assets

(For transfers on or after July 23, 2024, as per Section 2(42A) of the Income Tax Act)

👉 Key Point When an NRI sells property, the buyer is legally required under Section 195 of the Income Tax Act to deduct TDS at 12.5% (plus applicable surcharge and cess) on the entire sale price, not just on your profit.

While your final tax is only on the capital gains, this upfront deduction can be substantial. The primary mechanism to avoid this large deduction is to obtain a Lower TDS Certificate.

Section 54: The Property-to-Property Route

Section 54 is your go-to option when you're selling one residential property to buy another.

What Section 54 Offers

Under Section 54 of the Income Tax Act, individuals and HUFs can claim exemption on long-term capital gains from selling a residential house if they reinvest in another residential property.

Simple translation: Sell your house, buy another house, save on capital gains tax.

Eligibility Conditions for NRIs

1. Asset Type: Only residential property qualifies (house/apartment, not commercial)
2. Holding Period: Property must be held for more than 24 months
3. Reinvestment Timeline:
   Purchase new property: 1 year before OR 2 years after sale
   Construct new property: Within 3 years of sale
4. Location: New property must be in India
5. Holding Requirement: Don't sell the new property for 3 years

How Much Can You Save?

The exemption is the lower of:

• Your capital gains amount, OR
• The cost of the new property you're buying

Important Change: From Assessment Year 2024-25,

The maximum exemption under Section 54 is capped at ₹10 crores.

The Two-House Option: If your total capital gain is ₹2 crore or less, you have a once-in-a-lifetime option to purchase or construct two residential houses to claim the full exemption.

Real Example: Section 54 in Action

Ravi's Case (NRI in Abu Dhabi):

• Sold Mumbai flat for ₹80 lakh (bought for ₹30 lakh in 2019)
• Capital gains: ₹50 lakh
• Bought new apartment in Pune for ₹70 lakh

Tax Calculation:

• Without Section 54: ₹50 lakh × 12.5% = ₹6.25 lakh tax ((excluding surcharge and cess)
• With Section 54: Complete exemption (since new property cost > capital gains)
• Savings: ₹6.25 lakh

Section 54F: From Any Asset to Property

Section 54F is broader and often more useful for NRIs with diversified investments.

What Section 54F Offers

Section 54F provides exemption on long-term capital gains on sale of any capital asset (other than a residential house), provided one residential property is purchased.

Simple translation: Sell shares, bonds, land, gold - anything except residential property - and buy a house to save tax.

Eligibility Conditions for NRIs

1. Asset Type: Any long-term capital asset EXCEPT residential property
2. Examples: Shares, mutual funds, bonds, commercial property, agricultural land, gold
3. Reinvestment Timeline: Same as Section 54
4. Key Restriction: You should not own more than one house apart from the new house at the time of sale
   NOTE: The exemption is not just about not owning more than one house on the date of sale. It also disqualifies you if you buy or build another house soon after.
5. Proportionate Benefit: When the entire sum is reinvested, the entire amount is tax exempt. However, if only a part of the sale proceeds is reinvested, exemption is available proportionately.

Key Restrictions (The Deal-Breakers):

This exemption has strict conditions related to your other property ownership. You are not eligible if you:

1. Own more than one residential house (other than the new one) on the date you sell your asset.
2. Purchase another residential house within 1 year of the sale.
3. Construct another residential house within 3 years of the sale.

Owning or buying a non-residential property has absolutely no impact on your eligibility for the Section 54F exemption.

Real Example: Section 54F Success Story

• Sale Proceeds: ₹1,50,00,000
• Cost of Acquisition: ₹30,00,000
• Total Capital Gain: ₹1,20,00,000
• Amount Reinvested in Property (Sec 54F): ₹90,00,000
• Exempted Capital Gain under Sec 54F: (₹1.2 cr Gain / ₹1.5 cr Sale) x ₹90 lakh Reinvested = ₹72,00,000

1. Tax Calculation for Debt Funds

This section shows the tax impact when the asset sold is a Debt Mutual Fund.

2. Tax Calculation for Equity Funds

This section shows the tax impact when the asset sold is an Equity Mutual Fund, applying the specific rules under Section 112A.

Section 54 vs Section 54F: Key Differences

Capital Gains Account Scheme (CGAS): Your Safety Net

Here's where many NRIs miss out on huge savings: What if you can't find and buy the right property immediately?

What is CGAS?

The Capital Gains Account Scheme (CGAS) allows taxpayers to park their entire net sale consideration until they are reinvested for the prescribed purpose, ensuring they remain eligible for the exemption. Non-residents have to open a non-resident CGAS account (NRCGAS).

Simple explanation: It's like a holding account that keeps your tax exemption valid while you search for the right property.

How CGAS Works for NRIs

Timeline: Deposit capital gains before your ITR filing due date (July 31st)
Note: For FY 2024-25 (AY 2025-26), ITR filing deadline being extended to September 15, 2025.

This extension applies to taxpayers whose accounts are not required to be audited.

1. Usage Period: You have up to 3 years to use the money for property purchase/construction
2. Account Types:

• Type A (Savings): Easy withdrawals, savings account interest
• Type B (Fixed Deposit): Higher interest, restrictions on premature withdrawal

1. Documentation: Need Form A to open, Form C for first withdrawal, Form D for subsequent withdrawals
2. Authorized Banks: It should be clarified that a CGAS account cannot be opened at any bank. It must be opened with a branch of one of the 28 authorized banks designated by the scheme, which includes most public sector banks and major private banks.
3. Consequences of Not Using the Funds: A crucial piece of information is what happens if the money in the CGAS account is not used within the stipulated time (2 years for purchase, 3 years for construction).
   
   The unutilized amount is treated as taxable capital gains in the financial year in which the period expires. Tax will then have to be paid on it.
4. Taxability of Interest Earned: The content should mention that any interest earned on the deposit in both Type A (savings) and Type B (fixed deposit) CGAS accounts is taxable. It is treated as "Income from Other Sources" and must be included in the taxpayer's ITR.
5. Proportional Exemption under Section 54F: If the full sale amount is not invested. The exemption is calculated on a proportionate basis using the formula:
   Exemption = (Capital Gains x Amount Invested) / Net Consideration
6. Procedure for Withdrawals and Closure:

• Withdrawals: While Forms C and D are correctly mentioned, you could add that the amount withdrawn must be utilized within 60 days.
• Closure: To close the account after full utilization, the depositor needs to submit Form G, which requires certification from the Assessing Officer of the Income Tax Department.

CGAS Success Story

Ahmed's Smart Move (UAE-based NRI):

• Sold shares in March 2024 for ₹2 crores (capital gains: ₹1.5 crores)
• Wasn't ready to buy property immediately
• Deposited ₹2 crores in NRCGAS account before filing ITR in July 2024
• Found perfect apartment in Hyderabad in December 2024
• Used CGAS funds to purchase, claimed full 54F exemption
• Saved approximately ₹18.75 lakh in taxes

NRI-Specific Challenges and Solutions

Challenge 1: TDS Deduction by Buyers

The Problem:: When an NRI sells property in India, the buyer is liable to deduct TDS @ 12.5%. If the property is sold before completion of 2 years from the date of purchase, the buyer is liable to deduct TDS @ 30%.

When you sell a property for ₹1 crore on or after July 23, 2024, the buyer is legally required to deduct ₹14.30 lakh (14.3%) from the sale price and send it to the tax department.

(This is calculated using the new 12.5% base rate + 10% surcharge + 4% cess applicable for that slab).

This happens even if your actual tax on the profit is much lower.
The Solution:

The solution is to get a Lower TDS Certificate from the Income Tax Department before you finalize the sale.

1. You Apply: You file Form 13 online, showing the tax officer your exact capital gains calculation and your actual, lower tax liability.
2. They Approve: The officer verifies your calculation and issues a certificate that legally instructs the buyer to deduct only the correct, smaller tax amount. [ Refer example for calculation below]
3. You Benefit: You receive the maximum amount of cash in hand at the time of sale, avoiding any large, unnecessary deductions and the hassle of chasing a refund.

LTCG Tax & TDS Rates for NRIs

Challenge 2: Property Search from Abroad

The Problem: Finding and evaluating Indian property while sitting in Dubai/US is challenging.

The Solution:

• Use CGAS to buy yourself 2-3 years to find the right property
• Consider appointing a reliable property consultant
• Factor in the CGAS interest earnings (3-6% annually) in your calculations

Challenge 3: Documentation and Compliance

The Problem: Managing Indian paperwork from abroad is complex.

The Solution:

• Digitize all documents before leaving India
• Use registered mail/courier for important documents
• Consider appointing a Power of Attorney for property matters

Common Mistakes That Cost NRIs Lakhs

Mistake 1: Missing the Three-Year Rule

What happens: If you sell your new property within 3 years, the entire exemption gets reversed.

Real case: Suresh (Dubai-based NRI) used Section 54 to buy a flat in Pune, then sold it after 2 years for urgent money. Result: Had to pay ₹8.5 lakh in taxes plus interest.

Solution: Only buy property you plan to hold for at least 3 years.

Mistake 2: Buying Commercial Property

What happens: Only residential property qualifies for these exemptions.

Solution: Ensure the property is classified as "residential" in municipal records.

Mistake 3: Not Understanding the Proportionate Rule in 54F

What happens: Many NRIs think they need to invest only the capital gains amount in 54F, but it's actually the entire sale proceeds.

Solution: In 54F, invest the full sale amount for complete exemption, or accept proportionate exemption.

Mistake 4: Ignoring CGAS Deadlines

What happens: If you don't deposit in CGAS before the ITR filing deadline, you lose the exemption opportunity.

Solution: Set reminders and deposit even if you're still searching for property.

Step-by-Step Process for NRIs

For Section 54:

Before Sale:

• Ensure property is residential and held >24 months
• Calculate expected capital gains
• Start property search or prepare CGAS opening

During Sale:

• Collect all sale documents
• Obtain Form 16A from buyer (TDS certificate)
• Calculate actual capital gains

After Sale:

• Open CGAS account if property purchase will take time
• OR purchase new residential property within timeline
• File ITR-2 with capital gains details

Within 3 Years:

• Complete property purchase using CGAS funds
• Update property purchase details in subsequent ITR

For Section 54F:

Before Sale:

• Verify you don't own more than one house
• Calculate sale proceeds (not just capital gains)
• Plan for full reinvestment or accept proportionate exemption

Follow similar process as Section 54.

Tools and Resources for NRIs

To make your tax planning easier, use these Belong tools:

• Residential Status Calculator: Determine your tax status first
• NRI FD Rates Tool: Compare investment alternatives
• Compliance Compass: Ensure you meet all tax requirements
• NRI Tax Filing Service: Professional help for complex cases

Recent Changes You Must Know

1. ₹10 Crore Cap (Effective April 2024)

From Assessment Year 2024-25, the maximum exemption under Sections 54 and 54F is capped at ₹10 crores.
(Effective April 2024)

Impact: If you're buying property worth more than ₹10 crores, the excess won't count for exemption calculation.

Your Action Plan: What to Do Next

If you've already sold an asset:

1. Calculate your capital gains immediately
2. Determine if Section 54 or 54F applies to your case
3. If property purchase will take time, open CGAS account before your ITR filing deadline
4. Consider professional help for complex calculations

If you're planning to sell:

1. Estimate your capital gains and potential tax liability
2. Start property search early if you want to claim exemptions
3. Factor in TDS implications in your cash flow planning
4. Keep all purchase and improvement cost documents ready

Not sure about your specific case? Our NRI tax filing experts have helped hundreds of NRIs navigate these exemptions successfully. They can review your specific situation and suggest the optimal strategy.

Bottom Line

Section 54 and 54F are among the most powerful tax-saving tools available to NRIs. Used correctly, they can save you lakhs of rupees in capital gains tax while helping you build a property portfolio in India.

The key is understanding the conditions, planning ahead, and using tools like CGAS when you need more time to find the right property.

Remember: Tax laws can be complex, and everyone's situation is unique. While this guide covers the major aspects, consider consulting a tax professional for large transactions or complex scenarios.

Most importantly: Don't let the complexity prevent you from claiming legitimate tax benefits. With proper planning, these exemptions can significantly reduce your tax burden while helping you invest in Indian real estate.

Want to stay updated on the latest NRI tax rules and investment opportunities? Follow our blog for regular updates on Indian regulations, DTAA benefits, and smart investment strategies for NRIs.

Sources:

• Income Tax Department - Capital Gains
• RBI Guidelines on NRI Investments