Will investing ancestral house sale proceeds in bonds and property save capital gains?

• Claim capital gains exemption by investing in property or specified bonds.
• Invest only long-term capital gains for exemption, not full sale proceeds.
• Section 54 allows new house investment; Section 54EC allows bond investment.

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Wondering if you can save on capital gains if you invest ancestral house sale proceeds in bonds and property? Today’s Ask Wallet Wise explains how the exemption works under sections 54 and 54EC.

My grandmother purchased a residential house property in 1956. It was bequeathed to me and I have mutated it in my name in 2024. If I sell it now, can I invest the entire proceeds in bonds and property to save capital gains?

Expert’s Advice: Though there is no cost of assets received as a gift from specified relatives or as inheritance, either under a will or under personal law, the cost for the purpose of computing the capital gain is taken to be the cost for which the same was purchased by the last owner who had paid for it.

For capital assets acquired before April 1, 2001, the fair market value on that date can be taken as the cost for the computation of capital gains. As the house acquired in 1956 was received by you as an inheritance, you can opt to take the fair market value on April 1, 2001, as your cost for computing the capital gains. Likewise, the holding period for determining whether the capital asset has become a long-term asset or not is also counted from the date on which the same was acquired by the last owner who had paid for it.

Since the holding period of the residential house is more than two years, the difference between the sale price and the fair market value (as discussed above) will be taxed as long-term capital gains in your hands. To save tax on such long-term capital gains, you have two options, which can be used singularly or in combination. Please note that under both options, you have to invest only the long-term capital gains and not the entire sale proceeds.

The first option is available under Section 54, where you invest the unindexed long-term capital gains for the purchase or construction of another residential house in India within the prescribed time period.

For buying a ready-to-move-in house, the investment has to be made within two years from the date of sale of the existing house. Even if you buy a residential house within a year before the date of sale of the existing residential house, exemption under Section 54 can be claimed.  For self-construction or booking an under-construction house, a longer period of three years is available from the date of sale of the house, within which the construction of the house needs to be completed and possession obtained.

The amount which is not utilised for the purchase or construction of the house by the due date of filing your income tax return is required to be deposited in a bank account under the Capital Gains Account Scheme. The deposited money has to be used within the time prescribed for the purpose of buying or constructing the residential house.

The second option is under Section 54EC. You have to invest the long-term capital gains in Capital Gain Bonds of a specified financial institution within six months from the date of sale of the existing house.  A maximum of Rs 50 lakhs can be invested in these bonds in one financial year, as well as for claiming exemption in respect of a single year.