Home Truths for Global Indians: Can NRIs Really Claim Capital Gains Exemptions under Sections 54 & 54F?

With the rise in cross-border property transactions and the growing footprint of Non-Resident Indians (NRIs) in Indian real estate and capital markets, capital gains taxation has become a frequent and complex issue. While most NRIs are aware that long-term capital gains in India are taxable, not many understand that the Indian Income-tax Act does provide a pathway for exemption from such taxation-provided the reinvestment rules are followed precisely.

Through detailed research, practical experience, and a review of recent judicial interpretations, this article explores whether and how NRIs can claim exemptions under Section 54 and Section 54F. Though available in principle to both residents and non-residents, applying these provisions in cross-border scenarios is fraught with interpretational and procedural challenges. Let’s decode this layer by layer.

Understanding Sections 54 and 54F: What They Offer

Section 54:

Allows exemption from long-term capital gains arising from the sale of a residential property, if the gains are reinvested in another residential property in India. Exemption is limited to the amount reinvested and capped at ₹10 crore.

Section 54F:

Applies to gains from any long-term capital asset (except a residential house) provided net sale proceeds are invested in a residential house in India. If the entire amount is not reinvested, a proportionate exemption is granted.

Both sections are expressly available to individuals and Hindu Undivided Families (HUFs), regardless of their residential status, making them applicable to NRIs too.

1. What Qualifies as “One” House?

A recurring query from NRIs is: Can two adjacent flats be considered one house?

Courts have opined that multiple adjacent units can be treated as one residential house, if the layout, usage, and structure indicate unified living-such as a common kitchen, connecting doors, or merged interiors. However, if units are separate and independently functional, exemption may be denied.

The key is substance over form. Ensure structural integration and common usage are demonstrable.

Moreover, a one-time relief is available under Section 54 to reinvest in two houses (if gains don’t exceed ₹2 crore), but this can be exercised only once in a lifetime.

2. Time Limits: The Invisible Deadline Trap

For both sections:

• Purchasemust happen within 1 year before or 2 years after the date of transfer.
• Constructionmust be completed within 3 years.

What if the builder delays possession?

Courts have empathized with taxpayers facing delays beyond their control. Landmark rulings (e.g., Sardarmal Kothari and Sambandam Udaykumar) affirm that substantial investment within time is enough, even if the final possession or occupancy certificate is delayed.

Practical tip: Keep all payment proofs, builder correspondence, and construction status reports on record. Intent and effort matter just as much as completion.

3. Missed the Deadline? Enter CGAS

If reinvestment is not done before filing the ITR, the Capital Gains Account Scheme (CGAS) can be used to claim exemption.

Key considerations:

• Amount deposited must be utilized strictly for the new property.
• Any unused balance after 2 or 3 years (as applicable) becomes taxable.
• Withdrawal from CGAS requires Assessing Officer’s approval, which can involve paperwork and delay.

For NRIs, this adds another layer: CGAS accounts must be opened with eligible Indian banks, in India. This calls for timely action and coordination with your tax advisor and banker.

4. Lock-in Period: Hold or Be Taxed

The new house must be held for at least 3 years. If sold earlier:

• Under Section 54, the cost of acquisition is reduced by the exemption amount.
• Under Section 54F, the previously exempt amount is taxed as long-term capital gainsin the year of resale.

This condition is often overlooked by NRIs who might relocate or change plans. Plan wisely to avoid reversal of exemption.

5. The Foreign Property Dilemma Under Section 54F

A unique challenge arises under Section 54F: What if the NRI owns property abroad?

Section 54F denies exemption if, on the date of transfer, the assessee owns more than one residential house (other than the new investment). But does this count houses outside India?

Courtrooms are divided:

• Maries Joseph(Cochin Tribunal): Only Indian properties count.
• Babu Rajendra Prasad (Vizag Tribunal): Even overseas property disqualifies the claim.

Recommendation: NRIs with residential properties abroad must exercise caution while claiming 54F—especially if they’re under the jurisdiction of stricter tribunals.

6. In Whose Name Must the New Property Be?

This is perhaps the most litigated aspect.

While the law does not explicitly require reinvestment to be in the same name as the seller, courts have delivered contradictory rulings.

Conservative view:

• Investment must be in assessee’s name. (e.g., Prakash v. ITO, Ganta Vijaya Lakshmi)

Liberal view:

• If the entire investment flows from the assessee, the name may be flexible-such as spouse or HUF member. (e.g., Kamal Wahal, Jennifer Bhide, Vaidya Panalalmanilal)

Key takeaway: To be safe, make the investment in your own name unless you are willing to litigate if the need arises.