Tax rules: Can you claim Section 54 tax break if buying from family? Here’s what experts say

If you’ve sold a property and want to save on taxes while keeping your capital safe, 54EC bonds are an option. These government-backed bonds, like those from REC or NHAI, are exempt from long-term capital gains (LTCG) tax under Section 54EC if you invest within six months of sale. They have a five-year lock-in and offer around 5-5.25% taxable interest.

Alternatively, Section 54 exempts LTCG tax if proceeds from selling a residential property are reinvested in another home. Section 54F offers similar relief for gains from any asset, provided the entire sale amount funds a new residential property.

Selling your home and buying another can save huge taxes under Section 54 of the Income Tax Act. But what if you buy the new property from your spouse or family member? Is the exemption lost? Experts say Section 54 exemption, capital gains tax, and property reinvestment rules allow it.

Explaining a typical case, Sujit Bangar, Founder of Taxbuddy.com, said, when Mrs. Damani sold her flat in Mumbai’s upscale Powai area for Rs 5.98 crore, she believed she was making a sound financial move. To save on tax, she reinvested Rs 3.85 crore in a new Lodha flat, which she purchased from her husband. But her plan ran into trouble when the Income-tax Department denied her exemption claim under Section 54 of the Income Tax Act, raising questions about whether buying from a relative disqualifies you from this tax benefit.

“Many taxpayers wrongly assume that a property transaction between relatives automatically disqualifies them from claiming Section 54 benefits. That’s not true,” Bangar clarified. “The law focuses on whether the transaction is genuine, not just the relationship between buyer and seller.”

Understanding Section 54

Section 54 offers significant tax relief to property owners who sell a residential house and reinvest the capital gains in another residential property. To claim this exemption:

The property sold must be residential.

The seller should reinvest the gains in a new house within two years after the sale or one year before it.

The exemption allowed is the lower of the capital gain amount or the cost of the new house.

“The logic is that the taxpayer is continuing to hold residential property rather than pocketing the capital gains. So the government provides relief,” explained Bangar.

A real-life example

Mrs Damani’s case echoes that of Ravinder K. Arora, which reached the Income Tax Appellate Tribunal (ITAT) Delhi. Arora sold his Powai flat on 9 January 2020, earning a capital gain of Rs 4.21 crore. He then purchased a Lodha flat from his husband on 18 March 2021 for Rs 3.70 crore, having paid the amount through bank transactions and fulfilling other legal requirements like registering the deed and deducting TDS.

He claimed a Section 54 exemption of Rs 3.96 crore. Despite initial objections from tax authorities, the ITAT ruled in his favour, observing that:

The payment was made via bank transfer.

A registered sale deed existed.

The purchase fell within the two-year reinvestment window.

TDS had been deducted properly.

“No provision in the Income Tax Act bars you from buying property from your spouse or other relatives for the purpose of claiming Section 54 exemption,” Bangar confirmed. “As long as it’s a bona fide transaction, the exemption stands.”

Precedents support family transactions

Other court rulings have supported similar scenarios. For example, in CIT v R. Vijayalakshmi, the taxpayer bought property from a Hindu Undivided Family (HUF) and claimed Section 54 benefits. Similarly, in Ajay Gopal v ACIT, the taxpayer bought a house from his son, and in Sudha Trivedi v ITO, from her husband. In each case, the courts emphasized that the genuineness of the sale mattered more than familial ties.

“The courts have been clear that a genuine, documented transaction with proper monetary consideration is key,” Bangar stressed.

Checklist to claim Section 54

To avoid disputes like Mrs. Damani’s, Bangar advised following this checklist:

Make payments through verifiable banking channels (NEFT, RTGS, or cheque).

Register the sale deed properly.

Deduct TDS if required.

Complete the purchase within the prescribed timeline.

Maintain comprehensive documentation.

Key takeaway

Buying property from a spouse or close relative doesn’t automatically invalidate your Section 54 exemption claim. “The relationship alone doesn’t void your right,” Bangar concluded. “As long as the transaction is genuine, documented, and compliant with timelines, taxpayers can confidently claim the exemption and save substantial tax.”

This clarity could help many homeowners navigate the complexities of property sales and reinvestments, without fear of losing out on lawful tax benefits simply because of family connections.