Amit, a salaried professional in Bengaluru, sold his residential flat for ₹1.2 crore, earning a long-term capital gain of ₹45 lakh. Instead of paying tax on this gain, he planned his reinvestment wisely. Within six months, he booked an under-construction apartment and used part of the gains as the down payment.
Since the project would take time, he deposited the remaining unutilised amount in a Capital Gains Account Scheme account before filing his income tax return. Over the next two years, he systematically withdrew funds from this account to pay the builder as construction milestones were completed.
When you sell a property, capital gains arise. However, you can save on paying taxes on capital gains by utilising certain provisions of the Income Tax Act.
“The income tax provisions allow individuals and Hindu Undivided Families (HUFs) to claim an exemption on long-term capital gains arising from the transfer of a residential house property, provided the proceeds are reinvested into another residential house in India,” says Vishal Gada, founder and CEO, Aurtus, a full-service tax firm.
Purchase and construction time limits
“This comes under Section 54 of the Income Tax Act 1961, corresponds to Section 82 of the Income Tax Act 2025. Both sections, however, are similar,” says Anil Harish, Managing Partner, D.M. Harish & Co.
To qualify, the taxpayer must adhere to a strictly defined statutory window.
For purchase, the new property must be acquired either 1 year before or 2 years after the date of transfer of the original asset.
Also Read:
For construction, the new house must be completed within 3 years from the date of the original transfer.
In practice, this distinction between purchase and construction is quite relevant. The three-year window is typically relied upon in cases of under-construction properties or where the taxpayer is developing the property independently.
“While courts have, in some cases, taken a more practical approach where delays were beyond the taxpayer’s control, the general expectation from the tax authorities is that these timelines should be adhered to. As such, any delay beyond the given period can potentially put the exemption at risk unless the facts are particularly compelling,” says Kunal Sharma, Managing Partner, TARAksh Lawyers and Consultants.
Capital gains account scheme
“The capital gains account scheme (CGAS) helps preserve your exemption if you are unable to reinvest your capital gains immediately. If the capital gains are not fully utilised before filing your income tax return under section 139(1), the unutilised amount must be deposited in a CGAS account before the due date of filing the return,” says Abhishek Soni, CEO, Tax2Win, an income tax portal.
Also Read:
This deposit is treated as a deemed reinvestment, ensuring the exemption is not lost. The amount deposited must then be utilised within two years for the purchase of a property or within three years of its construction.
A significant modernisation occurred with the November 2025 amendment, which expanded the scheme’s accessibility. The definition of a ‘Deposit Office’ now includes authorised private-sector banking companies, moving beyond the traditional reliance on public-sector banks, explicitly recognises electronic modes (UPI, RTGS, NEFT, etc.) as valid for depositing funds.
To secure the exemption, the deposit must be made before filing the original return of income or before the expiry of the due date for filing the original return of income, whichever is earlier. “While some judicial precedents have been favorable toward deposits made before filing a belated or revised return, the safest harbor remains compliance with the original filing deadline. If the funds remain unutilised after the three-year window from the date of the , the remaining balance is charged to tax as long-term capital gain in the tax year in which that period expires,” says Gada.
Kolkata-based Raj Varma, 39, based in Kolkata, sold his residential property in 2023 but was unable to immediately reinvest the entire capital gains. To retain the exemption, he deposited the unutilised amount in a CGAS account before filing his return. Within two years, he purchased a new apartment, ensuring the exemption remained intact.
Process for closing capital gains account
If you do not use the money in the capital gains account scheme within three years from the date of the original capital gain, you can withdraw the money from the capital account, but only with the permission of the income tax department. “You have to apply to the IT and set out the fact that you sold a property and that you reinvested into the capital gains account with a view to buying or constructing a new house and that for whatever reason you have not actually done so,” says Harish.
Therefore, you want to withdraw the money from the capital account. The officer will then call upon you to pay the , and only then will give you a certificate to enable you to draw your money from the capital gains account and close the account.
Tax implications of selling within three years
Under Section 54 of the Income Tax Act, 1961, the benefit of exemption is subject to a minimum holding requirement of three years for the new residential property acquired or constructed. This effectively operates as a lock-in period to ensure the reinvestment is not merely temporary.
If the new property is transferred within 3 years from its purchase or construction, the earlier claimed exemption does not continue in its original form. Instead, the law provides for recalibrating the cost of acquiring the new property. Specifically, the cost of the new asset is reduced by the amount of capital gains exemption claimed under Section 54 of the Income Tax Act, 1961, resulting. in a higher taxable capital gain at the time of sale.
“This mechanism effectively withdraws the earlier exemption. Further, since the holding period is less than three years, the gain on such transfer is typically treated as a short-term capital gain, taxable at applicable slab rates. The combined effect is that the taxpayer not only loses the benefit of exemption but may also face a higher tax incidence upon early exit,” says Sharma.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics