When an NRI sells a property in India that has been held for more than 24 months, a 20% Long-Term Capital Gains (LTCG) tax applies on the indexed profit — plus surcharge and 4% cess. On a ₹50 lakh gain, that could mean ₹10–14 lakh going to the government.
But the Income Tax Act provides three legal exemptions — Sections 54, 54EC, and 54F — that can reduce this to zero if you reinvest the gains correctly and within the deadlines. NRIs are eligible for all three. This guide explains each exemption, the specific rules that apply to NRIs, and how to use the Capital Gains Account Scheme to bridge timing gaps.
Section 54 — Reinvest in a New Residential Property
- Property being sold: Must be a long-term residential property (held > 24 months)
- New property: Purchase within 1 year before or 2 years after the sale date, OR construct within 3 years of sale
- Location of new property: Must be in India (post-Finance Act 2023 amendment — overseas purchase no longer qualifies)
- Exemption amount: Lower of capital gain or cost of new property
- Limit: Only one new property. If gain exceeds ₹2 crore, you may invest in two properties — but only once in a lifetime
- NRIs eligible: Yes — confirmed by multiple High Court and ITAT rulings
- Lock-in: Do not sell the new property within 3 years, or the exemption is reversed
Section 54EC — Invest in Government-Backed Bonds
- Property being sold: Any long-term capital asset (not just residential)
- Bonds eligible: NHAI (National Highways Authority), REC (Rural Electrification Corp), PFC (Power Finance Corp), IRFC (Indian Railways Finance Corp)
- Investment deadline: Within 6 months from the date of transfer/sale — this is strictly enforced
- Maximum exemption: ₹50 lakh per financial year (not per sale)
- Lock-in period: 5 years — bonds cannot be sold, transferred, or pledged during this period
- NRIs eligible: Yes — NRIs can purchase these bonds and hold them in demat or physical form
- Tax on interest: Bond interest is taxable as income — plan accordingly
Section 54F — Selling Non-Residential Assets
- Applies when: You sell a long-term asset that is not a residential house (land, commercial property, shares, etc.)
- Condition: Invest the entire net sale consideration (not just gains) in a new residential property
- Timeline: Same as Section 54 — purchase within 2 years or construct within 3 years
- Restriction: You must not own more than one residential property in India (other than the new one) on the date of sale
- Exemption amount: Proportional to the amount invested relative to total sale consideration
- NRIs eligible: Yes
Can NRIs Claim Section 54 for Indian Property?
Yes — and this is a common point of confusion. Section 54 does not exclude NRIs. Indian courts and tax tribunals have consistently held that NRIs are entitled to claim Section 54 exemptions, just as residents are. The key condition added in 2023 is that the new property must be located in India. Purchasing a property in Australia, the UK, or Canada after selling Indian property no longer qualifies.
Combining Section 54 and 54EC
You can use both exemptions in the same year for the same sale — on different portions of the gain:
- Example: Gain of ₹80 lakh. Invest ₹40 lakh in a new residential property (Section 54) + ₹40 lakh in NHAI bonds (Section 54EC). Total gain exempted: ₹80 lakh. Capital gains tax: ₹0.
- The ₹50 lakh cap on Section 54EC applies per financial year — if your gain exceeds ₹50 lakh, Section 54 or 54F is needed for the balance.
Budget 2024 Update: 20% With Indexation or 12.5% Without?
For property sales on or after July 23, 2024, the default LTCG rate is 12.5% without indexation. However, for property acquired before July 23, 2024, taxpayers have the option to compute tax under the old regime at 20% with indexation — whichever results in a lower tax outgo.
This choice matters significantly for older properties where indexation substantially reduces the gain. A CA should compute both scenarios before filing your ITR.
The Capital Gains Account Scheme (CGAS): Your Safety Net
If you have sold the property but cannot complete the new purchase or bond investment before your ITR filing deadline (July 31), you can deposit the unspent capital gains in a Capital Gains Account Scheme at a designated bank (PSU banks like SBI, PNB, Bank of Baroda, etc.).
- This preserves your right to claim the Section 54 or 54F exemption while you complete the purchase
- The CGAS account has two types — Type A (savings, for day-to-day use) and Type B (term deposit, for larger amounts)
- You must utilize the funds within 2 years (for purchase) or 3 years (for construction), or the gains become taxable in the year the deadline lapses
- Funds in CGAS cannot be withdrawn for any purpose other than the intended property investment
Timeline Summary: Do Not Miss These Deadlines
- Section 54 (purchase): 1 year before or 2 years after the sale date
- Section 54 (construction): Within 3 years after the sale date
- Section 54EC bonds: Within 6 months of the sale date (strict — no extension normally granted)
- CGAS deposit: Before the ITR filing deadline of the year in which the sale occurs
Impact on TDS: Plan Before the Sale
Because the buyer deducts TDS on the full sale consideration (at 20–30%), even if you plan to claim an exemption, a large amount can be withheld unnecessarily. Apply for a Section 197 lower TDS certificate before the sale, declaring the exemptions you intend to claim in Form 13. The AO can then direct the buyer to deduct at a reduced rate matching your actual tax liability.
Frequently Asked Questions
Can I use Section 54 to buy a property abroad after selling my Indian property?
No. The Finance Act 2023 amended Section 54 to require that the new property be situated in India. Properties purchased abroad no longer qualify. If you want to reinvest gains overseas, the 54EC bonds route remains available up to ₹50 lakh.
What is the deadline for investing in Section 54EC bonds?
You must invest in NHAI, REC, PFC, or IRFC bonds within 6 months of the sale date. This deadline is strictly enforced and is rarely extended. If you miss it, the exemption is not available and the full capital gain is taxable.
Can I claim both Section 54 and Section 54EC on the same sale?
Yes — for different portions of the gain. You can reinvest part of the gain in a new property (Section 54) and invest another part in bonds (Section 54EC), provided each portion meets the respective conditions and the total exemption does not exceed the total capital gain.
I am selling my flat and want to construct a new home. Does Section 54 apply?
Yes. Section 54 covers construction within 3 years of the sale date — not just purchase. If you are constructing, deposit the capital gains in a CGAS account first to preserve the exemption, then draw down as construction progresses. Keep all construction bills and commencement certificates as documentation.
What happens if I sell the new property purchased under Section 54 before 3 years?
The exemption previously claimed is reversed. The capital gain that was exempted is added back to your income in the year you sell the new property and taxed accordingly. The 3-year lock-in under Section 54 is a hard condition.
Related reading: NRI Property Sale Tax Guide | Section 197 Lower TDS Certificate | Inherited Property in India as an NRI