The Income Tax Appellate Tribunal (ITAT) has upheld the Section 54 exemption for capital gains taxation, ruling that deduction under this provision cannot be denied on technical or documentary objections. According to the latest ITAT ruling, the Tribunal accepted the Joint Development Agreement and expenditure evidence as sufficient documentation for claiming the exemption. The ITAT noted that no specific defect or adverse finding was made on the genuineness of the investment, applying a liberal construction to this beneficial exemption provision. The disallowance was subsequently deleted, providing clarity on the interpretation of Section 54 requirements.
Tax experts confirm that you can invest the total ₹60 lakh from selling multiple properties in a single residential flat to claim capital gains exemption under Section 54 of the Income Tax Act. According to tax expert T S Khurana, even if you sell different floors of your property to different buyers, you can reinvest the total capital gain in one residential flat. The key requirement is that the new property must be a residential house and should not be commercial or under construction beyond the allowed timeline. The investment must be completed within the specified timeframe, with the capital gains account balance used within the allowed period. If the new property costs less than ₹60 lakh, the unused capital gain will be taxed.
Under the Income-tax Act, 1961, exemptions such as those under Section 54 are subject to a three-year lock-in period. If the newly acquired residential property is transferred within this period, the exemption previously claimed is withdrawn and becomes taxable. According to reports from Mint, this rule applies regardless of whether the property was sold for emergency purposes or other reasons. The exemption applies only to long-term capital gains, and if any portion of your gain is short-term, it will not qualify for exemption. You must not sell the new property for at least 3 years - if you sell it before 3 years, the exemption will be reversed, and you must pay tax on the gains.
For successful Section 54 exemption, you must buy the new flat within 2 years from the date of sale or construct it within 3 years. As confirmed by tax experts, the ₹30 lakh investment in the new house must be completed before February 2026 to avoid tax implications. Experts emphasize the importance of keeping proper documentation for all transactions to avoid issues with the tax department. Tax expert Mihir Tanna advises that cases involving multiple properties should include detailed information about all sold properties with dates, amounts, costs, and capital gains calculations, along with the action taken for tax savings or exemption under Section 54. The latest ITAT ruling specifically upheld that substantial investment in construction of a residential house and utilisation of capital gains for that purpose should be accepted as sufficient documentation.
Following the repeal of the 1961 Act and the introduction of the Income-tax Act, 2025 effective 1 April 2026, such cases are now governed by transitional provisions. As reported by Mint, Section 536(2)(h) of the Income-tax Act, 2025 provides that where conditions attached to an exemption claimed under the ITA 1961 are violated after the commencement of the ITA 2025, the previously exempted amount is deemed to be income in the year of violation under ITA 2025. This means that if a property is sold during FY 2026-27—i.e., within the three-year lock-in period but after the commencement of ITA 2025—the exemption will be taxed in the year of sale.
For NRIs living in the UAE, there are specific considerations regarding tax treaty benefits. As reported by Mint, it has been the general practice lately that the UAE Federal Tax Authority has not been issuing TRC to individuals before completion of stay in the UAE for at least 183 days during the relevant calendar year. However, Form 41 requires a valid TRC along with other prescribed details to avail DTAA benefits. Without a valid TRC, the form is considered incomplete for claiming treaty benefits, resulting in higher tax deduction at 20% plus applicable surcharge and cess. For NRIs facing this situation, there is a potential refund mechanism available as detailed in the previous section.
