The government has extended the capital gains reinvestment window under the new tax framework, offering greater flexibility to taxpayers.
Section 86 of the proposed legislation extends the eligibility period for reinvestment in a new residential property to two years from one year, replacing the previous Section 54F of the Income Tax Act, 1961.
The change aims to clarify ambiguities in the existing law, improve tax planning opportunities and reduce potential litigation, analysts said.
Under the current Section 54F, taxpayers must reinvest capital gains into a new residential property within one year of selling an asset to claim an exemption.
However, confusion over the interpretation of this provision, particularly regarding multiple residential properties, has led to disputes and legal challenges.
The new Section 86(5) and 86(6) address these concerns by offering a clearer framework and an extended timeline, which could impact pending tax disputes.
Rajarshi Dasgupta, executive director-tax, Aquilaw, said that while the core exemption remains unchanged, clarity in language and the expanded timeline will allow taxpayers greater flexibility in reinvestment decisions and capital gains tax planning.
"The change from one year to two years will help taxpayers structure their tax liabilities more efficiently," he added.
Vatsal Gaur, partner at King Stubb & Kasiva, advocates and attorneys, emphasised that the substance of Section 54F and new Clause 86 remains the same, but the refinement in wording eliminates interpretational ambiguities.
"The primary difference is the enhanced clarity around reinvestment eligibility," he noted. "This ensures a more precise application of capital gains tax exemptions while maintaining consistency in the law’s intent."
The extension of the reinvestment period aligns with India's expanding real estate sector, which is seeing record growth in housing demand.
According to Economic Survey 2024-25, released ahead of the Union Budget, the real estate market has reached an 11-year high in sales volume. The survey projects that housing demand could reach 93 million units by 2036, driven by economic stability, urban expansion, and infrastructure development such as metro projects and road network upgrades.
Sales across India’s top eight cities recorded an 11 per cent year-on-year growth in the first half of 2024, reflecting positive market sentiment and increased homebuying activity.
With a longer reinvestment window, experts anticipate that more taxpayers will benefit from capital gains exemptions, potentially stimulating further investment in residential properties.
"The extension provides a structured approach for investors and homebuyers to make informed decisions without the pressure of a short reinvestment window," said Dasgupta. "It is a welcome move that aligns tax policy with market realities."
Industry alert
Demand for residential properties remains "very strong" across major cities but the euphoria seen in the last few years is mellowing down a little bit, said Pirojsha Godrej, the executive chairperson of Godrej Properties, according to PTI.
Godrej Properties is one of the leading real estate developers in the country. It became the largest listed realty firm in 2024 in terms of sales bookings or pre-sales by selling more than ₹28,000 crore worth of properties.
Godrej noted that there is no demand slowdown in the housing market, as reflected in the company's pre-sales numbers.
"Am I seeing a slowdown in demand. The answer is 'No'. Because we have seen ₹500-crore-plus sales in our new housing project launches in five different cities (during the December quarter) across North, South, West and East India. That to me is pretty indicative of a very strong housing market," he said.
Pirojsha added: "But, I would say that some of that euphoria is perhaps mellowing down a little bit, particularly in Delhi-NCR... It has settled into a more sort of standard strong market."
"Euphoria that was there 6-12 months ago seems to have cooled off a little bit, but demand remains very strong," he observed.
