Should I invest in a residential unit, a commercial shop, or an office to get capital gains tax exemption on a property that I sold?

These are a set of queries raised by ET Wealth readers, which have been answered by our panel of experts.

I am a 76-year-old Indian resident planning to sell a 37-year-old 3-guntha plot located within municipal corporation limits. The sale price has appreciated nearly 17 times over the original purchase price. To save on capital gains tax, can I reinvest the proceeds in a residential unit, a commercial shop, or a commercial office? Also, what would be my tax liability? Which option would be more beneficial: being taxed at 12.5% without indexation or opting for long term capital gains (LTCG) tax at 20% with indexation benefits?

Amit Maheshwari Tax Partner, AKM Global: Under Section 54F of the Income Tax Act, capital gains exemption is available only if the entire net sale consideration is reinvested in a single residential house in India. The claimant must not own more than one other residential property and cannot purchase or construct another house within one and three years, respectively. Importantly, investments in commercial properties do not qualify. If only part of the proceeds is reinvested, the exemption is allowed proportionately, and the remaining capital gains are taxed at either 12.5% without indexation or 20% with indexation, whichever is more beneficial. Full exemption applies only if the cost of the new residential property does not exceed Rs 10 crore. Any investment above this limit is ineligible for exemption. In cases of long-term appreciation, indexation often lowers tax liability, making the 20% route preferable. However, if indexation doesn’t significantly increase the cost base, the 12.5% flat rate may be more tax-efficient. A careful comparison based on the sale price and inflation adjusted cost is advised to choose the optimal method.

Also read | I want to sell a property and redeem mutual funds to finance a new house purchase. Can I get LTCG tax exemption on both?

I purchased a property this year and hold mutual funds. Can I redeem mutual funds held for over a year to offset the long-term capital gains (LTCG) against the property purchase? Additionally, how can I partially redeem mutual funds to ensure that only units held for the long term are sold?

Shubham Agrawal Senior Taxation Adviser, TaxFile.in: Under Section 54F of the Income Tax Act, you can claim exemption on long-term capital gains from shares or mutual funds if the full sale proceeds are invested in a residential house—either within one year before or two years after the sale. Since you’ve already purchased the house, the sale must happen within a year after the purchase. To claim the exemption, you must invest the entire sale proceeds, not just the capital gains. For mutual funds, the holding period is determined on a FIFO (First-In, First-Out) basis—units held for more than a year before sale qualify as long-term. Choose a redemption date within one year of the house purchase, and sell only those units held for over a year. Your broker or fund house can provide purchase-date reports to help identify eligible units.


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