Dream House takes more than 3 Years to Build – Raise Time Limit under Sec. 54 & 54F

  • Blog|Income Tax|
  • 3 Min Read
  • By Taxmann
  • |
  • Last Updated on 4 January, 2021

In Income-tax Act, there is a provision which allows the taxpayers to claim an exemption from capital gains tax on the proceeds gained by selling a residential house or any other long-term capital asset, and propose to reinvest the amount in a new residential house.

Exemption Requirements u/s 54 & 54F:

To claim this exemption, the new house has to be purchased or constructed by the taxpayer to be eligible for this exemption. In case of purchase, the purchase date should be within one year before, or two years after the date of transfer of the title of the original house. If the taxpayer intends to construct the new house, he should complete the construction within three years of the date of transfer of the title of the original house.

A lot of litigations arose with regard to the claim of benefits under sections 54/54F as the new house could not be purchased or constructed by the taxpayer within the given time for various reasons. Unfortunately, the Income-tax Act stipulates only completion of purchase or construction of the new house property and completely disregards the amount actually invested by the taxpayer in a new property.

In case where a person buys property from a developer, the project is considered to be complete only when it receives the occupancy certificate. But, when an individual constructs his own house, there are no such set benchmarks to ascertain the actual date of its completion. Often the exemption is disallowed on the grounds of not completing the purchase or construction within the stipulated time, despite the fact that the entire amount has been invested in the new house. Such delays are often due to the default in part of the builders in not delivering the project in time. Also there are times when the buyer could not find a suitable property to invest in.

On the contrary, on numerous occasions the Courts and Tribunals have taken a liberal view and allowed the tax benefits to the taxpayers for the money invested by them within the stipulated period of two or three years even though the purchase or construction of the property has not yet been completed.

Case Reference:

The Karnataka High Court in the case of CIT vs. Shakuntala Devi [2016] 75 taxmann.com 222 (Kar,) has held that utilization of capital gains in  construction of residential house within stipulated period is sufficient to claim exemption under section 54 of the Act. This is irrespective of fact that neither sale transaction was concluded, nor its registration has taken place within the given period of time. Similarly, there are scores of decisions in favour of taxpayers rendered by various High Courts and Tribunal Benches in this regard. It has been seen that the judicial authorities are liberal in extending the benefits of exemption in case of impossibility of performance on the part of taxpayer or in case of no fault of the taxpayer in cases of delay in completing the new residential house. Nevertheless it is not practically possible or even advisable for the taxpayers to seek legal remedy due to the time delay and steep cost of litigations. As it has been seen in case of bigger residential projects or townships, the developers take a minimum period of 5 years before handing over the possession of the property to its buyers. In such case, if a buyer gets the possession of his new house after 3 years, it may not be possible for him to claim Sec. 54/54F exemption without choosing the path of litigations. It is safe to conclude that suitable amendments are needed in order to allow section 54/54F exemptions to the genuine taxpayers who invest in a project developed by builder registered under the Real Estate Regulation and Development (RERA) Act, 2016.  RERA is considered as one of the landmark legislations passed by the Government of India. Its objective is to reform the real estate sector in India, thus, encouraging greater transparency, citizen centricity, accountability and financial discipline. This is in line with the vast and growing economy of India as it is likely that many people will be investing in real estate sector in future.


A time limit of 5-6 years for roll over of investment from the date of sale (transfer) of capital asset should be granted under sections 54/54F of the Act, to claim benefits under these sections. It should be done through suitable amendments to these sections in the new Finance Bill. Relief should be provided retrospectively in the old cases, to those taxpayers who have actually invested the amount in purchase or construction of new house within the given time period although obtained the possession of the new house subsequently.

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