Selling a property can trigger long-term capital gains (LTCG) tax liability, but taxpayers can reduce it by investing the capital gains in another residential property and claiming exemption under Section 54 of the Income Tax Act.
In a recent ruling, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) dealt with this issue that involved a substantial capital gain arising from the sale of an immovable property jointly owned by the taxpayer and his mother.
The ruling is important for taxpayers dealing with older property transactions because the rules under Section 54 changed after April 1, 2015, and the amendment applied from AY 2015-16 onwards.
So, what does this ITAT ruling mean for taxpayers who sold a residential property before April 1, 2015, and invested their capital gains in more than one residential property?
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The case
In Vivek Juneja v. ACIT [ITA No. 8512/Mum/2025, AY 2013-14, order dated 29 May 2026], the Mumbai ITAT dealt with two issues pertaining to the availability of exemption u/s 54. The first issue concerned whether an expenditure incurred to make the newly purchased house habitable would be eligible for exemption u/s 54.
The second concerned whether, under the law applicable to AY 2013-14, the taxpayer could claim section 54 exemption for investment in more than one residential property and the treatment of the unspent amount deposited in the Capital Gains Account Scheme (CGAS).
The taxpayer jointly owned a property with his mother. During the relevant year, they sold the property and the taxpayer received Rs. 23.76 crore as his 50% share of the sale consideration.
He reported substantial long-term capital gains and reinvested part of the proceeds in a residential flat at Raj Classic for Rs. 4.90 crore. Since the flat was not in a habitable condition when purchased, he incurred Rs. 40.44 lakh on civil and electrical work. He also deposited Rs. 8.43 crore of the unspent amount in the CGAS and subsequently withdrew amounts from the account to invest in two other residential properties.
On the first issue, the Assessing Officer (AO) questioned the Rs. 40.44 lakh spent on the Raj Classic flat. Although the taxpayer submitted invoices and documents from the interior designer, the AO concluded that some of the expenses related to air-conditioning, painting, polishing, furniture, kitchen cabinets and other items did not necessarily make the flat habitable.
Accordingly, the AO allowed only Rs. 20 lakh on an estimated basis and disallowed the remaining Rs. 20.44 lakh. The CIT(A) also upheld this disallowance treatment. The ITAT examined the supporting documents and found that the flat was not fit for occupation when the taxpayer purchased it.
The invoices also established that the disputed expenditure related to the civil and electrical work required to make the property habitable. Since the taxpayer had substantiated the expenditure, the Tribunal found no justification for the AO to restrict the claim to Rs. 20 lakh on an estimated basis. It therefore deleted the entire disallowance of Rs. 20.44 lakh.
The second dispute concerned the taxpayer’s section 54 exemption. The AO took a view that once the taxpayer had claimed section 54 relief for the Raj Classic property, he could not claim further relief for investments in additional residential properties or for the balance amount deposited in the CGAS. The CIT(A) agreed with this approach.
The ITAT disagreed because the case related to AY 2013-14, when section 54 used the expression “a residential house”. The law changed only from AY 2015-16, when Finance (No. 2) Act, 2014 replaced this expression with “one residential house in India”.
Relying particularly on the Bombay High Court’s decision in Krishnagopal B. Nangpal v. DCIT, the Tribunal held that, under the earlier law applicable to this case, section 54 did not restrict the taxpayer’s exemption to investment in only one residential house.
Therefore, investment in more than one qualifying residential property could receive the benefit, subject to the other conditions of section 54. The Tribunal also noted that the tax authorities had allowed the taxpayer’s mother’s identical claim arising from the same sale transaction, which further supported the taxpayer’s case
The Tribunal also found no basis for denying the benefit of the Rs. 8.43 crore deposited in the CGAS merely because the taxpayer had already purchased one residential property. Section 54(2) protected the amount deposited in the scheme in the relevant year.
If the taxpayer ultimately failed to use the deposit within the prescribed period, the Department could tax the unutilised amount only at the appropriate later stage. In fact, the taxpayer had himself offered the remaining unutilised amount of Rs. 2.49 crore to tax in AY 2016-17.
Accordingly, the taxpayer succeeded on both the issues. The ITAT deleted the Rs. 20.44 lakh disallowance relating to improvement of the Raj Classic flat and directed the AO to allow the taxpayer’s section 54 claim, including the benefit available in respect of the CGAS in accordance with the law applicable to that year. The Tribunal consequently allowed the taxpayer’s appeal.
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Section 54 and CGAS: Can taxpayers claim both exemptions?
There was no bar in the law preventing a taxpayer from parking unutilised capital gains in the Capital Gains Account Scheme simply because a Section 54 exemption has already been claimed on one property.
For transactions before 1 April 2015, the term ‘a residential house’ was judicially read to include more than one house, so the department could not have denied the deduction on this ground alone.
Post the 2014 amendment, however, the benefit is restricted to one residential house, and hence similar arguments may not be available for present-day transactions.
“Section 54 covers expenditure that makes a newly bought house habitable, essentially genuine civil and electrical work. Movable furniture, appliances and purely decorative or lifestyle upgrades may stand on weaker ground,” said Ashish Mehta, Partner at Khaitan & Co.
Can taxpayers still claim Section 54 exemption for multiple residential properties if the property was sold before April 1, 2015?
Taxpayers may claim Section 54 exemption for more than one residential property if the capital gain relates to Assessment Year 2014-15 or an earlier year. During that period, Section 54 referred to investment in “a residential house,” which courts interpreted to include multiple houses.
However, the said position changed from Assessment Year 2015-16, when the law replaced this expression with “one residential house in India.” Therefore, the earlier benefit generally applies to properties sold up to 31 March 2014.
Since the case of Vivek Juneja v. ACIT pertained to AY 2013–14, the ITAT held that the Assessing Officer could not deny the section 54 exemption solely because the taxpayer had invested in more than one residential property. This ruling can support taxpayers with pending disputes for such earlier assessment years.
Selling a house? Avoid these mistakes while claiming Section 54
The takeaway for anyone selling a house and reinvesting is simple: get the timeline and the paperwork right.
Keep a professional’s record of the property’s condition, maintain clean item-wise invoices, separate core habitability work from furnishings, and report any unutilised CGAS balance in the correct year. Sound documentation is the difference between a claim that holds and one that is disallowed.
If a taxpayer does not utilise the CGAS amount within the prescribed period, it cannot be taxed prematurely. Any addition can only be made after the three-year period expires, in the year the amount is deemed to be unutilised.
Documentation is the key and will be the real basis to decide these kinds of factual cases. A professional’s assessment recording that the property was not habitable, backed by detailed, item-wise invoices linking each expense to civil or electrical work, is what would help the taxpayer defend any proposed adjustments by the tax authorities.
“A taxpayer cannot be denied a Capital Gains Account Scheme (CGAS) deduction merely because a Section 54 exemption has already been claimed on another property, and any unutilised deposit can only be taxed after the three-year period expires, not prematurely,” according to Mehta.
“Section 54 also covers genuine civil and electrical work needed to make a new house habitable, and the department ad-hoc disallowances may be defendable where the claim is backed by proper invoices and a professional’s assessment,” Mehta further added.
The real lesson for anyone reinvesting sale proceeds is to get the timeline and the paperwork right, document the property’s condition, keep handy all the item-wise invoices, and report any unutilised balance lying in the CGAS account in the correct year.
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Section 54: Can you claim exemption for properties in different locations?
For the tax law applicable up to Assessment Year 2014-15, taxpayers could invest in residential properties at different addresses or locations and still claim Section 54 exemption.
However, this principle does not apply from Assessment Year 2015-16, when Section 54 restricted the exemption to “one residential house in India.”
According to CA (Dr.) Suresh Surana, to claim the exemption under the earlier law, the taxpayer must satisfy the following key conditions:
- An individual or HUF must earn long-term capital gains from selling a residential house.
- The same taxpayer must purchase or construct the new residential property.
- The taxpayer must purchase the properties within one year before or two years after the sale, or complete their construction within three years after the sale.
- If the taxpayer has not used the capital gain before the return-filing due date, the taxpayer must deposit the unspent amount in the Capital Gains Account Scheme within the prescribed time.
- The taxpayer must retain purchase agreements, payment records, construction bills and Capital Gains Account Scheme documents to support the claim.
Joint property sale: How is Section 54 exemption calculated?
Each co-owner must calculate the capital gain and claim the Section 54 exemption separately. The ownership ratio generally determines each person’s share of the sale consideration, cost of acquisition and related transfer expenses. Each owner must then calculate the capital gain arising on their respective share.
As per Surana, the exemption does not depend only on the owner’s share of the sale consideration. It would be the lower of the long-term capital gain attributable to that co-owner; or
the amount that the co-owner invests in the eligible new residential property.
Therefore, one co-owner’s investment or exemption does not automatically benefit the other. Each person must satisfy the conditions of Section 54 and maintain evidence of ownership, sale proceeds and investment.
In Vivek Juneja v. ACIT, the Tribunal separately considered the taxpayer’s 50% share of Rs. 23.76 crore and allowed the exemption based on his qualifying investments.
Disclaimer: This article is based on the Mumbai ITAT order in Vivek Juneja v. ACIT [ITA No. 8512/Mum/2025, AY 2013-14, order dated 29 May 2026]. The observations and relief granted by the Tribunal are based on the facts, evidence and circumstances of that particular case and should not be construed as a general exemption from tax scrutiny of share transactions. Taxpayers should seek professional advice based on the facts of their individual cases.
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