Section 54 vs Section 54F: Can an Under-Construction Flat Qualify for Capital Gains Exemption?

Section 54 vs Section 54F: Can an Under-Construction Flat Qualify for Capital Gains Exemption?

When people sell a property and reinvest the money into another home, two sections of the Income-tax Act often enter the conversation:

Section 54 and Section 54F.

They are similar, but they apply in different situations.

The confusion becomes particularly interesting when the new property being purchased is still under construction.

Does an under-construction apartment qualify?

Does the buyer have to wait until possession?

And if the property is legally a residential apartment but possession has not yet been handed over, does that automatically push the transaction into Section 54F?

The answer is more nuanced than a simple “under construction = Section 54F.”

Section 54 and Section 54F — the fundamental difference

The first question is:

What asset did you sell?

Section 54

Section 54 applies where the capital gain arises from the transfer of a long-term residential house property.

Broadly, the exemption is available where the taxpayer invests in another residential house in India, subject to the statutory conditions and time limits.

The important point is that the original asset itself must be a residential house.

Section 54F

Section 54F applies where the long-term capital asset sold is not a residential house.

For example, depending on the facts, Section 54F can apply when the original asset is:

• land,
• shares,
• certain investment assets,
• commercial property,
• or another long-term capital asset that is not a residential house.

The new asset under Section 54F must be a residential house in India, subject to the conditions of the section.

So the basic distinction is:

That distinction is crucial.

The complicated situation: an under-construction apartment

Now consider a common situation.

A taxpayer books an apartment from a developer.

The apartment does not physically exist as a completed, possession-ready home at the time of booking.

The taxpayer makes payments according to a construction-linked payment plan.

Later, the taxpayer sells another property and wants to use the capital gains to fund the apartment.

At first glance, someone might say:

“The apartment isn’t complete yet, so it isn’t a residential house. Therefore Section 54 cannot apply.”

But Indian tax jurisprudence has not treated the question that mechanically.

Several judicial decisions have recognised that booking an under-construction flat with a builder can, depending on the facts, be treated as investment in the construction of a residential house rather than simply as a conventional purchase of an already-completed property.

For example, the Mumbai ITAT has held that booking an under-construction flat with a builder can be regarded as construction of a residential house for Section 54 purposes.

There are similar decisions concerning Section 54F.

This is one of the most important points to understand:

“Under construction” does not automatically mean “ineligible for Section 54.”

Why the builder matters

A taxpayer does not personally construct the apartment brick by brick.

Instead, the taxpayer enters into an agreement with a developer.

The developer constructs the residential unit.

The taxpayer makes payments according to the construction schedule.

Courts and tribunals have recognised that, in appropriate circumstances, this arrangement can effectively represent the taxpayer’s investment in the construction of a residential house.

In Kishore H. Galaiya, for example, the Mumbai ITAT considered a flat booked with a builder under an instalment arrangement and treated the transaction as construction rather than simply purchase of a completed property.

The same principle has appeared in subsequent decisions.

In another Mumbai ITAT decision concerning Section 54, the tribunal stated that purchase of an under-construction flat could amount to investment in construction of a residential house.

Does possession have to happen within three years?

This is another major misconception.

The statutory language concerning construction generally refers to the residential house being constructed within three years from the transfer of the original asset.

That does not necessarily mean that the taxpayer personally has to physically receive possession on or before the last day of the three-year period.

There are judicial decisions where taxpayers were allowed relief even though possession had not been taken within the period, provided the underlying investment/construction requirements were satisfied.

For example, in Hemender Singh, the Delhi ITAT considered an under-construction flat where substantial construction had been completed and held that the absence of possession itself was not necessarily fatal to a Section 54F claim.

Similarly, other decisions have treated investment in a builder’s under-construction residential property as construction even where completion or possession involved builder-side delays.

However, this does not mean that the three-year requirement can simply be ignored.

The taxpayer still needs to satisfy the statutory conditions.

What if the builder delays the apartment?

This is where the jurisprudence becomes particularly useful.

Imagine:

• A taxpayer sells a qualifying long-term asset.
• The taxpayer invests the proceeds in an under-construction residential apartment.
• The taxpayer makes substantial payments to the developer.
• The developer delays construction or possession.

Can the taxpayer automatically lose the exemption?

Not necessarily.

Recent judicial decisions have continued to recognise that where the taxpayer has genuinely invested the money in acquiring or constructing a residential house and the delay is attributable to the developer, the taxpayer should not necessarily be denied the benefit merely because the developer failed to complete the property on schedule.

The factual record becomes extremely important.

Evidence can include:

• Builder-buyer agreement
• Allotment letter
• Payment receipts
• Construction-linked demands
• Bank statements
• Construction status
• OC/CC documentation
• Correspondence with the developer
• Evidence of builder-side delay
• Possession correspondence

The stronger the documentary trail showing that the taxpayer actually invested the money into the residential property, the stronger the factual foundation for the exemption claim.

But there is an important distinction: Section 54 vs Section 54F

Suppose the asset being sold is itself a residential apartment.

If it qualifies as a long-term residential house property, Section 54 is the natural provision to examine.

If the asset being sold is instead something that is not a residential house, Section 54F becomes relevant.

This distinction depends on the asset being transferred, not simply on whether the replacement property is under construction.

That is the point that is often missed.

The new property being under construction does not automatically convert a Section 54 situation into Section 54F.

Section 54F is triggered primarily because of the nature of the original asset sold.

A particularly important complication: what exactly is being sold?

There is another situation that requires care.

Sometimes a person sells an apartment after booking it but before possession or registration.

What exactly is being transferred?

It could involve rights or an interest arising under:

• an allotment,
• a builder-buyer agreement,
• an agreement for sale,
• contractual rights,
• or another form of property interest.

The tax treatment can depend on the legal nature of those rights and the facts of the transaction.

Therefore, one should not automatically say:

“I didn’t have possession, therefore I wasn’t selling a residential house.”

Nor should one automatically say:

“I had paid most of the money, therefore it was definitely a residential house.”

The legal character of the asset being transferred needs to be examined.

Another important distinction: OC vs possession

Occupation Certificate and possession are not necessarily the same event.

An OC generally relates to the regulatory permission/status of the building or relevant portion of it.

Possession concerns the actual contractual and physical handover of the unit to the allottee.

Therefore, a property can have an OC while questions remain regarding:

• possession,
• handover,
• documentation,
• infrastructure,
• access,
• completion of contractual obligations,
• or other conditions.

From a tax perspective, however, the exact implications depend on the facts and the applicable interpretation of the Income-tax Act.

The mere fact that an OC has been issued does not automatically answer every tax question concerning whether an asset is “purchased,” “constructed,” or transferred.

The practical lesson for under-construction buyers

The safest way to analyse the situation is through three separate questions.

Question 1 — What did I sell?

Was it:

A. A residential house?

→ Section 54 may be relevant.

Or:

B. Another long-term capital asset?

→ Section 54F may be relevant.

Question 2 — What am I buying/building?

Is the replacement asset:

• an already completed residential house,
• an under-construction apartment,
• a flat booked with a developer,
• or a property being independently constructed?

Under-construction property is not automatically disqualified.

Judicial decisions have repeatedly considered builder-booked flats within the construction framework of Sections 54/54F in appropriate circumstances.

Question 3 — When and how much did I invest?

This is where the paperwork becomes critical.

The taxpayer should be able to demonstrate:

Capital gain / sale consideration

↓

Investment into qualifying residential property

↓

Payments made within the applicable statutory period

↓

Construction/purchase evidence

↓

Compliance with the remaining conditions of Section 54 or 54F

This is far more important than simply asking whether the apartment had possession on a particular date.

Section 54F has an additional mathematical issue

There is another major difference.

Section 54F can operate proportionately.

Broadly, where the cost of the new residential house is less than the net consideration from the original asset, the exemption is generally proportionate rather than automatically covering the entire capital gain.

Conceptually:

Exemption = LTCG × Cost of New Asset ÷ Net Consideration

So if someone sells a non-residential long-term capital asset and receives ₹2 crore net consideration but invests only ₹80 lakh into the new residential property, the entire capital gain may not be exempt.

The calculation is based on the statutory formula and the specific facts.

This is one reason Section 54F can be materially different from Section 54.

What about investing only part of the money?

This is where people often misunderstand Section 54.

Section 54 is primarily concerned with the capital gain, rather than requiring the entire sale consideration to necessarily be reinvested in the new residential house in the same way Section 54F operates.

Section 54F, by contrast, has the net-consideration/proportionate exemption mechanism.

Therefore:

“I am not reinvesting the entire sale proceeds”

does not have the same consequence under Section 54 as it does under Section 54F.

The exact exemption still needs to be calculated under the applicable section.

What if the new flat was already under construction before the old property was sold?

This is another area where the answer is more nuanced than many tax articles suggest.

Courts have recognised circumstances where construction of the new residential property began before the transfer of the old asset, without automatically defeating the exemption.

For Section 54F, for example, judicial decisions have held that the commencement date of construction is not necessarily fatal if the statutory investment/construction requirements are otherwise met.

Therefore, the simplistic rule:

“Construction must start only after selling the old property”

is not an accurate universal statement.

What if the flat isn’t completed because of the builder?

This is perhaps the most important point for an under-construction buyer.

There are decisions where courts/tribunals have recognised that a taxpayer should not necessarily lose the benefit of a beneficial exemption merely because a developer delayed completion.

A 2026 decision discussing Section 54F reiterated that where the taxpayer had invested in construction and the developer’s delay prevented completion/registration, the benefit should not necessarily be denied merely because the property was not fully complete or registered within the relevant period.

Another 2026 decision similarly discussed builder delay and the treatment of investment in an under-construction residential project.

However, these are fact-specific judicial decisions, not a blanket guarantee that every under-construction purchase qualifies.

The Capital Gains Account Scheme can also matter

There is another important compliance issue.

If the relevant capital gains have not yet been utilised before the applicable return-filing deadline, the Capital Gains Account Scheme can become relevant.

This is particularly important when someone intends to claim exemption but has not yet completed the purchase/construction.

The taxpayer should therefore not assume that simply intending to buy a house later is sufficient.

The timing and treatment of unutilised amounts need to be examined carefully.

So, can an under-construction apartment qualify under Section 54?

Potentially, yes.

That is the key takeaway.

The correct proposition is not:

“Section 54 only applies after possession.”

Nor is it:

“Every under-construction apartment automatically qualifies.”

The more accurate position is:

An under-construction flat purchased/booked from a developer can, depending on the facts and applicable judicial interpretation, be treated as investment in the construction of a residential house for Section 54 purposes. Possession itself is not necessarily the decisive test.

There is judicial support for this approach.

A simple way to remember Section 54 vs 54F

Think of it this way:

SECTION 54

I sold a qualifying residential house.

I reinvest in another residential house.

↓

Section 54

SECTION 54F

I sold another type of long-term capital asset.

I reinvest in a residential house.

↓

Section 54F

And in both situations:

The replacement property can potentially be under construction.

The fact that it is under construction does not, by itself, determine whether Section 54 or 54F applies.

The nature of the original asset sold is the starting point.

The bigger lesson

The tax question should therefore never be reduced to:

“Did I have possession?”

The proper analysis is:

What exactly was sold?

↓

Was it a long-term capital asset?

↓

Was it a residential house or another type of asset?

↓

Which section applies?

↓

What exactly was acquired/constructed as the replacement?

↓

When were the investments made?

↓

How much was invested?

↓

Were the statutory conditions satisfied?

↓

What documentary evidence supports the claim?

That framework is much more reliable than treating “under construction” as an automatic disqualification.

Final takeaway

The biggest misconception is that Section 54 = completed house and Section 54F = under-construction house.

That is not the correct way to distinguish them.

The primary distinction is the nature of the original asset being sold.

An under-construction residential flat can, in appropriate circumstances, be treated as construction/acquisition of a residential house for the purposes of these provisions. Courts and tribunals have repeatedly considered builder-booked flats within this framework, including cases where possession was delayed by the developer.

At the same time, exemption claims are highly fact-dependent. The agreement, payment schedule, date of transfer, nature of the asset sold, investment dates, construction status and statutory compliance all matter.

So before deciding that an under-construction apartment must be dealt with under Section 54F, the first question should be: What exactly was the original asset that was sold?