Old vs New Tax Regime: Section 54F vs Section 86 for Capital Gains on Property

Selling property in India? You're probably worried about the capital gains tax bill that comes with it. Here's some good news—both the old and new tax regimes offer you ways to save big on taxes if you reinvest your sale money in a residential house. Let me break down Section 54F (from the old Income Tax Act 1961) and Section 86 (from the new Income Tax Bill 2025) in simple words, so you can understand which rules apply to you and how to make the most of them.

What's the Big Picture?

Capital gains tax is what you pay when you sell an asset—like gold, shares, land, or commercial property—at a profit. The government charges tax on this profit. But here's the catch: if you take that money and buy a residential house in India, you can claim a tax exemption. This means you pay little to no tax on your gains.

Section 54F and Section 86 both provide the same fundamental tax exemption for individuals and Hindu Undivided Families (HUFs) when they sell long-term capital assets and reinvest the proceeds in a new residential property in India.

Think of it this way: the government wants to encourage people to invest in housing. So they're giving you a tax break for doing exactly that.

Section 54F – The Old Tax Regime Rule

Section 54F has been around since the Income Tax Act 1961. Even though we have a new tax bill introduced in 2025, Section 54F still applies to most taxpayers right now. So let's understand it properly.

Who Can Use Section 54F Capital Gains Exemption?

Only individuals and Hindu Undivided Families (HUFs) can claim this benefit. Companies or partnership firms cannot use it. Also, you need to meet these conditions:

The Property You're Selling: You can sell any long-term capital asset except a residential house. This includes:

• Gold or jewelry
• Shares and stocks
• Commercial property (shops, offices)
• Land or plots
• Mutual funds

Long-term means you've held the asset for more than 24 months (2 years) for property, or more than 12 months for shares and mutual funds.

What You Must Do: You must purchase a new residential house within 1 year before or 2 years after selling your asset, or construct a house within 3 years from the sale date.

Important Restriction: You cannot own more than one residential house (apart from the new one you're buying) on the date you sell your asset. Also, you cannot purchase another house within one year after the sale.

How Much Tax Exemption Can You Get?

The calculation is straightforward but depends on how much you reinvest:

Full Exemption: If you invest the entire sale proceeds (net consideration) in buying or building a residential house, you get full exemption on your capital gains. No tax!

Partial Exemption: If you invest only a part of the sale money, your exemption is proportionate. Here's the formula:

Exemption = (Capital Gains × Amount Invested in House) ÷ Net Sale Consideration

Let me give you an example: Suppose you sold shares for ₹50 lakhs and made a capital gain of ₹30 lakhs. If you invest ₹40 lakhs in buying a new house, your exemption would be:

(₹30 lakhs × ₹40 lakhs) ÷ ₹50 lakhs = ₹24 lakhs

So you get exemption on ₹24 lakhs, and the remaining ₹6 lakhs is taxable.

The ₹10 Crore Cap

Here's something crucial: Since April 1, 2024, the maximum deduction under Section 54F is capped at ₹10 crore. Even if your capital gains are ₹20 crores, you can only claim exemption up to ₹10 crores.

What If You Can't Buy the House Immediately?

Life doesn't always work according to tax deadlines, right? Maybe you sold your gold today but haven't found the perfect house to buy yet. Don't worry—there's a solution.

If you cannot use the capital gains before your tax return due date, you should deposit the money in a Capital Gains Account Scheme (CGAS) with authorized banks. This deposit counts as an investment for claiming the exemption. But remember—you must actually use this money to buy or construct a house within the time limits (2 years for purchase, 3 years for construction), otherwise the exemption gets withdrawn and you'll have to pay tax.

Section 86 – The New Tax Bill 2025 Version

The government introduced the Income Tax Bill 2025 in February 2025 to simplify and modernize tax laws. Section 86 replaces Section 54F in the new bill, but the core concept remains the same—just with some important updates.

What's Similar Between Section 54F and Section 86?

Most basic rules remain unchanged:

• Available only to individuals and HUFs
• Applies when you sell long-term capital assets (except residential house)
• You must reinvest in a residential house in India
• Same time limits: buy within 1 year before or 2 years after sale; construct within 3 years
• Proportionate exemption if you invest less than the full amount
• ₹10 crore exemption cap applies

What's Different in Section 86?

Section 86 explicitly caps the capital gain tax exemption at ₹10 crores, unlike Section 54F where this cap was added through amendments. The language is clearer in the new law.

But here's the biggest change—and it's important:

The "Kitchen Test" – A Game Changer

In December 2025, a landmark case (Ram Kishore Seth vs ITAT) introduced what experts now call the "kitchen test." This affects how we define "one residential house."

Here's what happened: A person owned three separate units on different floors in the same building. He thought they counted as "one house" since they were in the same property. But the tax authorities disagreed.

The tribunal ruled that independent residential units can be determined by their own kitchens rather than just their respective floors. If you own multiple units with separate kitchens and earn rental income from them, they count as multiple houses.

What This Means for You: If you own two or more units—even in the same building—and each has its own kitchen, you cannot claim exemption under Section 86 (or Section 54F). This is stricter than how people interpreted the old law.

Before selling your assets, check: Do you own multiple residential units with separate kitchens? If yes, you might need to restructure or sell those properties first to become eligible for the exemption.

Practical Tips for Property Buyers and Sellers

Should You Choose Old or New Tax Regime?

As of now, the Income Tax Act 1961 is still in force, so Section 54F applies. The new Income Tax Bill 2025 has been introduced but hasn't become law yet. Once it's enacted, Section 86 will replace Section 54F.

The good news? For capital gains exemptions on property, both sections work almost identically. So the planning strategies remain the same whether you're dealing with 54F or 86.

Planning Your Property Sale

Timing Matters: If you're planning to sell shares, gold, or commercial property and want to save on capital gains tax, start looking for a residential house before you sell. Why? Because you can buy the house up to 1 year before selling your asset and still claim the exemption. This gives you more time to find the right property.

Location Must Be India: The new residential property must be located in India. Buying property abroad does not qualify for exemption. So if you were thinking of investing in that Dubai apartment, it won't help you save on Indian capital gains tax.

One House Rule: This is the trickiest part. You cannot own more than one residential house on the sale date (other than the new one). So if you own a house in Mumbai and another in Pune, you'll need to sell one before you can claim this exemption.

Exception: If those properties are on different floors of the same building but share common facilities and don't have separate kitchens, they might count as one house—but this is risky territory after the Ram Kishore Seth case. Always consult a tax advisor for such situations.

What About the Capital Gains Account Scheme?

The government updated the Capital Gains Account Scheme (CGAS) for 2025, and now 19 banks including major private banks are authorized to open CGAS accounts. This makes it easier.

You can now deposit money through UPI, BHIM, NEFT, RTGS, debit cards, and credit cards. No need to visit the bank branch physically for most transactions.

Common Mistakes to Avoid

Don't Miss the Purchase Deadline: You have 2 years to buy or 3 years to construct. If you cross this deadline, your entire exemption gets withdrawn in the year the deadline expires. Set reminders!

Don't Buy Another House Too Soon: If you buy the new house using your exemption and then purchase another residential property within 2 years, your exemption gets cancelled. The tax authorities will treat your original capital gain as taxable income.

Don't Sell the New House Quickly: If you sell the new residential house within 3 years of purchase or construction, the exemption you claimed earlier gets withdrawn. The exempted amount gets added back to your capital gains in the year you sell.

Document Everything

Keep these documents safe:

• Sale deed of the asset you sold (shares, gold, property)
• Purchase deed or construction bills for the new house
• Bank statements showing money flow
• CGAS account statements if applicable
• Form 10BA (must be filed with your income tax return to claim exemption)

Real-Life Example

Let's understand with a complete example:

Rahul sold commercial property in March 2025 for ₹80 lakhs. He bought this property in 2020 for ₹40 lakhs. His long-term capital gains = ₹40 lakhs.

Scenario 1 – Full Exemption: Rahul uses the entire ₹80 lakhs to buy a residential apartment in Mumbai in January 2026. He doesn't own any other house. Result: Full exemption on ₹40 lakhs. Zero tax on capital gains.

Scenario 2 – Partial Exemption: Rahul uses only ₹60 lakhs to buy a house and keeps ₹20 lakhs for other expenses. Exemption = (₹40 lakhs × ₹60 lakhs) ÷ ₹80 lakhs = ₹30 lakhs. He pays tax on the remaining ₹10 lakhs capital gain.

Scenario 3 – Delayed Purchase: Rahul can't find a suitable house immediately. He deposits ₹80 lakhs in CGAS account in June 2025 (before his tax return deadline). He claims full exemption for now. In December 2026, he finally buys a house using that money. Exemption stays valid. But if he doesn't buy by March 2027 (2 years deadline), the exemption gets cancelled.

Section 54 vs Section 54F – Don't Get Confused

Many people confuse Section 54 with Section 54F. Here's the difference:

Section 54: Use this when you sell a residential house and buy another residential house. This is for house-to-house transactions.

Section 54F: Use this when you sell any other long-term asset (gold, shares, land, commercial property) and buy a residential house.

For most readers of this article, Section 54F and its new version Section 86 are what matter—because you're selling non-residential assets.

Final Thoughts

Capital gains tax on property can be hefty—long-term capital gains from property sale are taxed at 20% under the old rules or 12.5% under new rules without indexation. But with smart planning using Section 54F (or Section 86 in the future), you can legally reduce this tax to zero.

The key points to remember:

1. You can claim exemption only on long-term capital gains
2. Must reinvest in a residential house in India within time limits
3. Can't own more than one house at the time of sale
4. Maximum exemption is ₹10 crores
5. The "kitchen test" now matters—multiple units with separate kitchens count as multiple houses
6. Use CGAS account if you need more time

Whether you're dealing with Section 54F today or Section 86 tomorrow, the fundamental goal is the same: encourage people to invest in housing while giving them tax relief. Just make sure you follow all the conditions carefully, maintain proper documentation, and consult a qualified tax advisor for your specific situation—especially if you have multiple properties or complex transactions.

The government has made it easier for property buyers in 2025 with more banks offering CGAS accounts and clearer rules. Take advantage of these provisions and plan your property transactions wisely to maximize your tax savings!

Disclaimer: Tax laws keep changing. Always verify current rules with a tax professional before making major financial decisions. This article is for educational purposes and not a substitute for personalized tax advice.