Imagine this: after years of living abroad, you decide to sell your inherited or long-held property in India. The paperwork is sorted, a buyer is ready, and the deal is almost done. But just as you begin to celebrate, the reality of capital gains tax hits, suddenly, a sizeable portion of your hard-earned money is at risk of being taxed. This is a situation many NRIs face, often unaware that help lies in a little-known but powerful tax relief, Section 54 of the Indian Income Tax Act.
Section 54 isn’t just another legal clause; it’s a lifeline that lets NRIs save tax on the sale of a residential property by reinvesting the capital gains in another residential house in India. Whether youre planning to move back, invest for the future, or simply avoid losing money to tax, this provision can be a smart tool when used right. But like every good opportunity, it comes with its own set of rules, timelines, and recent updates that you must follow carefully.
In this blog, we’ll walk you through how Section 54 applies to NRIs, what kind of properties qualify, how to reinvest your gains, and what to avoid. If youre an NRI looking to make the most of your property sale in India, understanding this section could save you lakhs, and offer peace of mind in the process.
Understanding Section 54: A Tax-Saving Opportunity for NRIs
Let’s say youre an NRI who bought a small flat in India years ago, maybe it was for family, maybe as an investment. Now, years later, you decide to sell it. Because you’ve owned it for more than 24 months, it qualifies as a long-term capital asset, which means the profit from the sale is subject to long-term capital gains (LTCG) tax.
Here’s where Section 54 steps in like a helpful friend. This provision under the Indian Income Tax Act allows you to avoid paying LTCG tax, but only if you reinvest the capital gain into another residential property in India. Think of it as a rollover benefit: sell one home, buy another, and skip the tax in between (within limits).
What’s great is that this benefit isn’t limited to residents, NRIs are also eligible, provided they meet some basic conditions.
Who Qualifies for Section 54?
- You must be an NRI who is selling a residential house property in India, this includes flats, bungalows, or even land attached to the building.
- The sold property must be held for at least 24 months before sale.
- To claim exemption, you must reinvest the capital gain (not full sale value) into another residential property in India.
- The new property must be purchased within 1 year before or 2 years after the saleor constructed within 3 years from the date of sale.
How NRIs Can Avail Section 54 Exemption
So, you’ve sold your residential property in India and made a long-term capital gain. Naturally, youd want to hold on to as much of that gain as possible. That’s where Section 54 comes into play—but only if you follow the rules carefully.
The key thing to remember is that the exemption under Section 54 applies only to the capital gains amount, not the full sale value of the property. As an NRI, you must reinvest that capital gain into another residential property in India to claim this benefit.
There are two clear options for reinvestment:
1. Purchase of a Residential Property
You can buy a new residential house in India:
- Within 1 year before the date of sale of the original property, or
- Within 2 years after the date of sale
This option suits those who already have a property in mind or have recently purchased one.
2. Construction of a Residential Property
You can also choose to construct a new house in India, but you must complete the construction within 3 years from the date you sold your original property.
Whether you choose to buy or build, the new property must be a residential property located in India—foreign property won’t qualify.
Essential Rules and Conditionsfor NRIs Claiming Section 54
While Section 54 offers NRIs a great way to save tax on long-term capital gains, the benefit comes with a few important rules. To make sure your claim is valid and fully optimized, you need to stick to the conditions laid out under the law.
1. Time Frame:
You must reinvest the capital gains within specific time limits:
- Purchase: The new property must be bought within 1 year before or 2 years after the sale of the original property.
- Construction: If youre building a new house, it must be completed within 3 years from the date of sale.
2. Location:
The new property must be situated in India. Section 54 benefits do not apply to properties purchased or constructed outside the country.
3. Number of Properties:
Normally, exemption is for one property. However, if the capital gain does not exceed ₹2 crores, exemption can be claimed for investment in up to two properties, but this is allowed only once in a lifetime.
- Maximum Limit:
- As per recent amendments, the exemption is capped at ₹10 crores. Any capital gain above this amount will be taxable.
- Capital Gains Account Scheme (CGAS):
- If you are unable to reinvest the gains before the due date for filing your tax return, the unutilized amount must be deposited in a Capital Gains Account Scheme with a bank. This amount must be used to buy or construct the property within the specified time.
TDS and Compliance for NRIs
When a Non-Resident Indian (NRI) sells property in India, the transaction is subject to Tax Deducted at Source (TDS) under Section 195 of the Income Tax Act. In the case of long-term capital gains, the buyer is required to deduct TDS at the rate of 12.50%, plus applicable ,cess and surcharge which may vary depending on the total sale consideration and the residential status of the seller.
However, in many cases, this TDS is calculated on the entire sale value, not just on the actual capital gains earned. As a result, the tax deducted may be significantly higher than the actual tax liability of the NRI seller, especially if exemptions like Section 54 are available.
To avoid such excess tax deduction and refund delays, NRIs can apply for a Lower or Nil TDS Certificate from the Income Tax Department under Section 197. This certificate allows the buyer to deduct TDS at a reduced rate (or not at all), based on the seller’s estimated capital gain and eligible exemptions.
Obtaining this certificate before the sale is highly advisable, as it ensures that only the correct amount of tax is deducted at source. This not only improves cash flow but also eliminates the long wait for tax refunds—making the entire transaction smoother and more efficient for NRIs. Proper planning and early application are key to making the most of this facility.
Illustration: How Section 54 Works in Real Life
Meet Harish, an NRI living in Australia, who owns a residential flat in Noida that he bought back in 2017 for ₹1.1 crores. In June 2025, he decides to sell the flat and successfully closes the deal at ₹2 crores.
Since he held the property for more than 24 months, the profit is considered a long-term capital gain. After calculating her gain as ₹70 lakhs, Harish now faces a significant tax liability on this amount, unless she uses a smart provision under the Income Tax Act: Section 54.
Scenario 1: Full Reinvestment
Harish plans wisely and invests the entire ₹70 lakhs in a newly constructed apartment in Gurgaon within two years of selling his Noida flat. Since he reinvested the full capital gain, he becomes eligible for a complete exemption from tax under Section 54. That means no tax is payable on the ₹70 lakhs.
Scenario 2: Partial Reinvestment
In another case, suppose Harish only invests ₹40 lakhs in a new flat. He will receive exemption only on that amount. The balance ₹30 lakhs from her capital gain will be taxed as long-term capital gain.
This example highlights how NRIs like Harish can legally reduce or even eliminate capital gains tax simply by reinvesting the profits in another residential property in India, making Section 54 a valuable tool in smart real estate tax planning.
Recent Developments NRIs Should Know
In recent years, the Indian government has introduced a few important updates to Section 54 that NRIs must keep in mind while planning a property sale.
The maximum exemption limit under Section 54 has been capped at ₹10 crores. This means that even if you reinvest more than ₹10 crores from your capital gains into a residential property, any gain above ₹10 crores will still be taxable.
Also, the previously available flexibility to claim exemption on two residential properties, if your capital gains do not exceed ₹2 crorescan now be exercised only once in your lifetime. NRIs need to plan their property transactions carefully to make the most of this one-time opportunity.
Tips for NRIs to Maximize Section 54 Benefits
- Start Early: Before selling your property, identify potential residential reinvestments. This helps you stay within the required timeframes and avoid last-minute decisions.
- Use the CGAS Wisely: If you’re not ready to reinvest immediately, deposit the gains in a Capital Gains Account Scheme (CGAS) before the ITR due date. This keeps your claim valid while you finalize your next purchase.
- Seek Professional Advice: Tax laws for NRIs come with nuances. A qualified tax consultant can help you navigate the process, apply for lower TDS if needed, and ensure you claim the exemption without errors.
Final Thoughts
For NRIs, Section 54 isn’t just a tax benefit, it’s a chance to grow wealth in India, preserve family assets, and make meaningful investments. For example, if you sell a flat in Gurugram and reinvest in a charming heritage home in Pondicherry, you not only save tax but also create lasting value. With good planning and timely action, this provision can be a key part of your cross-border financial strategy.
