News: Save Capital Gains Tax by Reinvesting in Another House-19-04-2026

A seller who makes a long-term capital gain on a residential property can avoid tax on it by reinvesting in another house within set time limits, tax experts say.

Vishal Gada, founder and CEO of tax firm Aurtus, said the provisions allow individuals and Hindu Undivided Families (HUFs) to claim exemption on long-term capital gains from the transfer of a residential house, provided the proceeds go into another residential house in India. Anil Harish, managing partner, D.M. Harish & Co., said this falls under Section 54 of the Income Tax Act 1961, which corresponds to Section 82 of the Income Tax Act 2025, and the two are similar.

For a purchase, the new property must be acquired within one year before or two years after the transfer of the original asset. For construction, the new house must be completed within three years. The three-year window is typically used for under-construction properties or self-built homes.

Kunal Sharma, managing partner, TARAksh Lawyers and Consultants, said courts have at times taken a practical view where delays were beyond the taxpayer’s control, but tax authorities generally expect the timelines to be met, and any delay can put the exemption at risk.

Where the gain cannot be reinvested at once, the capital gains account scheme (CGAS) preserves the exemption. Abhishek Soni, CEO of income tax portal Tax2Win, said any amount not utilised before filing the return under section 139(1) must be deposited in a CGAS account before the due date. The deposit is treated as deemed reinvestment and must then be used within two years for a purchase or three years for construction.

A November 2025 amendment widened access. Authorised private-sector banks now count as a ’Deposit Office’, and electronic modes such as UPI, RTGS and NEFT are explicitly recognised.

Gada said the deposit must be made before filing the original return or before its due date, whichever is earlier. Some judicial precedents have favoured deposits made before a belated or revised return, he said, but complying with the original deadline is the safest course. Any balance unutilised after three years from the original transfer is taxed as long-term capital gain in the tax year in which that period expires.

Two examples illustrate the route. Amit, a salaried professional in Bengaluru, sold his flat for Rs 1.2 crore with a long-term gain of Rs 45 lakh. Within six months he booked an under-construction apartment, used part of the gain as down payment, placed the rest in a CGAS account before filing his return and withdrew it over two years to pay the builder at construction milestones. Raj Varma, 39, of Kolkata, sold his property in 2023, deposited the unutilised amount in a CGAS account and bought a new apartment within two years.

If the money is not used within three years, it can be withdrawn only with the income tax department’s permission. Harish said the taxpayer must apply, explaining that the property was sold, the gain was deposited to buy or build a house and this was not done. The officer will ask for the capital gains tax to be paid and only then issue a certificate allowing withdrawal and closure of the account.

The new house also carries a three-year holding requirement under Section 54. If it is transferred within three years of purchase or construction, its cost of acquisition is reduced by the exemption claimed, raising the taxable gain. Sharma said this effectively withdraws the earlier exemption. Because the holding period is under three years, the gain is typically treated as short-term and taxed at slab rates, so the taxpayer may face a higher tax incidence on early exit.