Selling mutual funds? This one costly mistake could blow your LTCG exemption

What if selling your house before redeeming mutual funds could help you legally save lakhs in taxes? That’s exactly what one investor learned when planning to cash in on booming equity returns.

Rajiv, a 46-year-old IT consultant in Bengaluru, had a simple plan: redeem an equity mutual fund in FY 2025–26, lock in long-term capital gains (LTCG), and use the profits to buy a new home. But he had a problem—not with the market, but with the tax code.

Rajiv already owned two residential properties—one for his family and another as a rental unit. He figured selling the mutual fund and reinvesting in a new house would allow him to avoid LTCG tax under Section 54F of the Income Tax Act. After all, he was buying a house with the money—wasn’t that the whole point of the exemption?

Not quite.

A quick consultation with a tax advisor revealed a critical clause: Section 54F disqualifies investors who own more than one house on the date of sale (or redemption) of the original capital asset. Rajiv’s plan would have failed this condition—and cost him lakhs in taxes.

So he flipped the script.

Before redeeming his mutual fund, Rajiv sold his second house. Now, on paper, he owned just one property—the one he lived in. Then, he redeemed the mutual fund, generated the LTCG, and moved ahead with purchasing the new residential property. Because he timed it right, he qualified for Section 54F—saving tax on his mutual fund gains.

What’s more, because he also used the LTCG from selling the second house to buy the same new property, Section 54 applied too. Result: he got tax exemption under both Sections 54 and 54F—legally and cleanly.

Tax professionals advise following this sequence—sell one house first, then redeem your equity investment—to ensure compliance with Section 54F conditions and maximise exemption potential.

The key takeaway?
Sequence matters. If Rajiv had sold his mutual fund first, owning two houses would have disqualified him from Section 54F benefits.

By selling one house first, then redeeming his mutual fund, and finally investing in a new home, Rajiv optimised his tax planning—and gave himself a massive financial edge.