Section 54F and Section 86 House Exemption Guide 2026
Quick answer: For transfers governed by the Income-tax Act, 2025, the familiar section 54F relief now appears in section 86. An individual or HUF selling a long-term asset other than a residential house can reinvest the net consideration in one residential house in India. Full relief normally requires investing the whole net consideration; otherwise relief is proportionate.
The page keeps its familiar “section 54F” address because taxpayers still search by that name, but the Income-tax Act, 2025 took effect on 1 April 2026. CBDT’s transition guidance says the 1961 Act continues to govern tax years beginning before that date, while the 2025 Act governs tax years beginning on or after it. Identify the applicable tax year before choosing between former section 54F and current section 86.
What changed in 2026?
The Income-tax Act, 2025 reorganised and renumbered the law. The relief commonly called section 54F under the 1961 Act is carried into section 86 of the 2025 Act. The core idea remains familiar: long-term capital gain from an asset other than a residential house may be relieved when the net consideration is invested in one residential house in India.
This is not a general promise that buying any property removes capital-gains tax. The claimant, original asset, new house, ownership position, amount invested and dates must all satisfy the section. Tax treatment can also turn on whether the original asset is long-term under the rules applicable to that asset. Preserve the contract notes, sale deed, transfer-expense proof and purchase or construction records.
The eligibility test
Work through these questions in order:
- Are you an individual or a Hindu undivided family? Section 86 is framed for these claimants, not every type of taxpayer.
- Did you transfer a long-term capital asset other than a residential house? A separate provision may apply when the original asset itself is a residential house.
- How many other residential houses did you own on the transfer date? The relief is blocked if you owned more than one residential house other than the proposed new asset.
- Is the new asset one residential house in India? Keep the registered document, payment trail and possession or construction records.
- Are the investment dates within the statutory windows? A purchase may be made within one year before or two years after the original transfer; construction may be completed within three years after it.
Do not decide eligibility from a portal label, a builder’s assurance or the name used in a bank account. The statute and your documents control.
Full and proportionate exemption
The calculation uses net consideration, not merely the capital gain. Net consideration means the full value of consideration received or accruing on the original transfer, reduced by expenditure incurred wholly and exclusively in connection with that transfer.
If the cost of the new residential house is at least the net consideration, the section can relieve the whole eligible capital gain. If the new-house cost is lower, the relief is proportionate:
Exempt amount = long-term capital gain × new-house cost ÷ net consideration
Hypothetical example: A person has a long-term capital gain of ₹24 lakh and net consideration of ₹60 lakh after eligible transfer expenses. If the qualifying new-house cost is ₹45 lakh, the proportionate amount is ₹24 lakh × ₹45 lakh ÷ ₹60 lakh = ₹18 lakh. This example only illustrates the formula; it does not determine the asset’s holding period, cost base or tax rate.
For this computation, section 86 treats the cost of the new asset and the amount deposited under the specified scheme as not exceeding ₹10 crore. Spending more does not raise the recognised amount beyond that statutory cap.
Purchase, construction and deposit deadlines
| Action | Statutory window under current section 86 |
|---|---|
| Purchase the new house | Within one year before or two years after the date of transfer |
| Construct the new house | Within three years after the date of transfer |
| Deposit an unspent amount | Before furnishing the return, and no later than the applicable return due date under section 263 |
The investment window can extend beyond the return-filing deadline. Where the amount has not been used for purchase or construction before filing the return, the unused qualifying amount must be deposited in the notified scheme in the prescribed manner within the statutory deadline. A normal savings account is not a substitute merely because the money remained untouched.
Record the exact dates of transfer, payments, registration, possession, construction certificates and deposit. If a builder delays completion or payments span tax years, obtain advice on the facts rather than assuming that a booking form alone settles the issue.
Events that can withdraw the relief
The exemption is vulnerable if the taxpayer does any of the following within the specified period:
- transfers the new residential house within three years of its purchase or construction;
- purchases another residential house, other than the new asset, within two years after the original transfer; or
- constructs another residential house, other than the new asset, within three years after the original transfer.
Section 86 specifies how the earlier exempt amount is brought back into the capital-gain computation when a disqualifying event occurs. Do not treat the three-year period as a casual “lock-in” slogan: the relevant consequence depends on which event occurred and when.
A practical document file
Keep one indexed folder with:
- proof showing the original asset, acquisition date and transfer date;
- sale agreement or transfer statement and evidence of consideration;
- invoices for brokerage and other expenditure claimed against consideration;
- working papers for cost, indexation where applicable and long-term gain;
- a list of residential houses owned on the transfer date;
- new-house agreement, deed, payment receipts and bank statements;
- architect, contractor and completion evidence for construction;
- deposit account opening form, passbook and withdrawal records, if used; and
- the filed return, computation and any tax-adviser opinion.
Reconcile every figure in the return with this folder. The exemption calculation, the capital-gains schedule and the property information should not tell different stories.
Section 54 versus former section 54F
The two reliefs are often confused. The former section 54F/current section 86 route concerns a long-term asset other than a residential house and tests how much of the net consideration went into the new house. Relief for gain on transferring a residential house sits in a different provision and follows its own computation. Start by identifying the original asset; do not select a section merely because both routes involve buying a home.
If the amount or eligibility is disputed
Reply to an income-tax notice through the official e-filing account and attach a dated reconciliation. State the original asset, transfer date, net-consideration calculation, eligible gain, new-house payments and deposit details. If the dispute turns on joint ownership, multiple units, delayed construction, development agreements or a transfer around the statutory transition, consult a qualified tax professional with the documents. This guide cannot resolve fact-specific tax characterisation.
Frequently asked questions
Is section 54F abolished from 1 April 2026?
Its familiar subject was reorganised under the Income-tax Act, 2025. For transfers governed by the new Act, the corresponding house-reinvestment relief is in section 86. The old section number remains relevant when reading the 1961 Act for an earlier period.
Must I reinvest only the capital gain?
No. Under this route, full relief generally requires the qualifying new-house cost to be at least the net consideration. Investing less can produce proportionate relief under the statutory formula.
Can I own one other house on the transfer date?
The section disqualifies a claimant who owns more than one residential house other than the new asset on that date. Ownership questions can be fact-sensitive, particularly with joint interests, so document the position.
Can the new house be outside India?
No. Current section 86 specifies one residential house in India.
Is a normal fixed deposit enough for the unspent amount?
No. The statute refers to deposit under the notified scheme in the prescribed manner. Confirm the authorised account type and deadline before depositing.
What is the ₹10 crore limit?
For the section’s computation, the recognised cost of the new asset and deposited amount cannot exceed ₹10 crore. It is not a separate cash benefit or a general cap on the property’s sale price.
Can I sell the new house after two years?
Selling within three years of purchase or construction is a statutory withdrawal event. Check the precise dates before contracting to sell.
Which year’s law should I use?
Use the law applicable to the tax year. CBDT says the 1961 Act continues for tax years beginning before 1 April 2026, while the 2025 Act governs tax years beginning on or after that date. Where the facts or proceedings straddle the transition, obtain case-specific advice.