Bought under-construction flat? Check how Section 54 applies to LTCG exemption

The exemption can be claimed if a ready-to-move-in residential house is purchased within two years from the date of sale of the residential house

• Section 54 exemption applies if flat possession is within 3 years of house sale.
• Payments made in 2023 and 2024 count if possession is within the 3-year window
• Invest plain LTCG amount, not indexed gains, for exemption eligibility

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Today’s Ask Wallet-Wise breaks down how Section 54 applies to the LTCG exemption for an under-construction flat purchased in three instalments.

Ask Wallet-Wise initiative offers expert advice on matters related to personal finance and money-related queries. You can email your queries to askwalletwise@nw18.com, and we will try to get a top financial expert to address.

In November 2025, I sold my residential house with Rs 20 lakh LTCG. I had booked an under-construction flat in February 2023, and the payment is being made in three annual instalments. Can payments made in 2023 and 2024 be used to claim the LTCG exemption under section 54, though the booking was made outside the two-year window?

Expert’s Advice: Section 54 provides for exemption for profits made on the sale of a residential house property, which is held for two years or more, provided the capital gains are invested for acquiring or constructing a residential house within the prescribed time period.

The exemption can be claimed if a ready-to-move-in residential house is purchased within two years from the date of sale of the residential house. Even if a residential house is purchased within one year before the date of sale of the house, the exemption can be claimed.

If the assessee chooses to construct a house on their own or books an under-construction property, the exemption can be claimed provided the construction is completed and possession is obtained within three years from the date of sale of the residential house. The start date of construction or the timing of payments is not material. What matters is that the house is completed and possession is received within the prescribed period.

So the payment already made during 2023 and 2024 can be taken into account for computing the amount of long-term capital gains available, as the limit of two years does not apply here in case of booking of an under-construction property.

Please note that since the indexation benefit is not available for computing the amount required to be invested, you will have to invest the plain long-term capital gains and not the indexed long-term capital gains as mentioned by you.

For claiming the exemption, it is not necessary that the same money as realised on the sale of the house property gets invested. The exemption is available as long as the amount of investment in the new residential house is equal to or more than the plain long-term capital gains realised.

Please ensure that you get possession of the booked flat within three years from the date of sale of your residential house, else the income tax department may refuse to give you the benefit of exemption, and the matter may get litigated.