How to save LTCG tax when selling mutual funds and property u/s 54 and 54F

If you redeem your equity mutual funds and earn long-term capital gains (LTCG), you can claim an exemption under Section 54F by investing the gains in a new residential property. But what happens when you own more than one house? Today’s Ask Wallet Wise query decodes the nitty-gritty around Sections 54 and 54F of the Income Tax Act.    

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I am planning to sell an equity-oriented mutual fund scheme during the current financial year 2025–26, from which I expect to earn substantial Long-Term Capital Gains (LTCG). I intend to invest such LTCG in buying a residential house. At present, I own two residential properties in my name. I plan to buy the new residential house after selling one of the two properties currently owned. The LTCG realized from the sold property will also be used towards purchasing the new property. Is the above plan permissible under the tax rules to save tax on LTCG?

Expert Advice: Section 54F of the Income Tax Act allows an individual or HUF to claim exemption in respect of long-term capital gains earned on the sale of any asset other than a residential house if the net sale proceeds are invested in purchasing a residential house within two years from the date of sale. Even if you had purchased a residential house within one year prior to the sale of such assets, the exemption under Section 54F can be claimed. In case the taxpayer opts for an under-construction property or self-construction, a longer period of three years is available from the date of sale of the asset.

If the net proceeds are not fully invested, the exemption will be available proportionately. The benefit of indexation is no longer available for computing capital gains for exemption purposes, so only the unindexed LTCG is to be considered.

One of the conditions for being eligible under Section 54F is that you should not own more than one residential property on the date of sale of the capital asset in respect of which the exemption is claimed. Since you would own two residential properties on the date of redemption of the equity-oriented scheme, you cannot claim exemption under Section 54F if you redeem your equity investment before selling one of the residential houses.

Section 54, on the other hand, allows exemption from LTCG arising from the sale of a residential house if the unindexed LTCG is invested in another residential house within the same timelines as explained under Section 54F. You can claim exemption under both Section 54 and Section 54F in respect of the same residential property, provided all other conditions are met.

I would advise you to sell one of the existing residential houses before redeeming your equity mutual fund investment. This will ensure that you are not disqualified by the condition of owning more than one house on the date of redemption of your equity investments. By following this sequence—first selling one house and then redeeming the equity investments—you will be able to claim the LTCG exemption under both provisions.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

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