Selling two inherited properties in one year? Know how the ₹50 lakh capital gains exemption rule works

A taxpayer who inherited two flats through a will from a relative asked whether both properties could be sold in the same financial year for a combined consideration of ₹60 lakh and whether the entire taxable gain could be invested in eligible capital gains bonds.

The Income Tax Department, while explaining provisions under Section 54EC of the Income-tax Act, 1961, states that where capital gains arise from the transfer of a long-term capital asset, being land or building or both, and the taxpayer invests in a long-term specified asset within six months from the date of transfer, the gains are exempt subject to prescribed conditions.

The department further clarifies that investment in such specified assets cannot exceed ₹50 lakh during a financial year. The limit also applies to investments made from capital gains arising from the transfer of one or more original assets during the financial year of transfer and the subsequent financial year.

According to CA Abhishek Soni, CEO and Co-founder, Tax2win, an individual can sell both inherited properties in the same financial year. However, the exemption available under Section 54EC is capped at ₹50 lakh in a financial year.

"Even if the long-term capital gains from the sale of the two properties are higher, investment in specified bonds under Section 54EC cannot exceed the prescribed limit of ₹50 lakh," he said.

This means that any taxable long-term capital gain beyond the eligible Section 54EC investment limit will remain taxable unless the taxpayer claims exemption under another applicable provision.

Can Section 54 offer additional tax relief?

Taxpayers may explore exemption under Section 54 of the Income-tax Act, 1961, if the conditions prescribed under the law are fulfilled. The Income Tax Department states that Section 54 applies when long-term capital gains arise from the transfer of a residential house and the taxpayer purchases or constructs another residential house in India within the specified timelines.

• The asset sold is a long-term capital asset being a residential house in India.

• The taxpayer purchases another residential house in India within one year before or two years after the date of transfer.

• The taxpayer constructs a residential house in India within three years from the date of transfer.

• The exemption is available to the extent of the amount invested in the new residential house, subject to the conditions prescribed under Section 54.

What inherited property sellers should remember

Depending on the facts of the case, taxpayers may evaluate eligibility for exemptions under Sections 54EC and 54, subject to fulfilling the conditions prescribed under each provision.