Capital Gains for Home Buyers: Section 54F vs. Section 86 Explained [Old vs New Tax Act Series- Article 1]

The Income Tax Act 2025 has redefined Section 54F as Section 86. However, this is not a mere change in name. The two sections do provide the same capital gaintax exemption for capital assets sold, provided that the proceeds from those sales are used to purchase Residential Real Estate. Section 86 caps the amount of the capital gain tax exemption at ₹10 Crores, which is not found in Section 54F.

More importantly, the Ram Kishore Seth case (ITAT 2025) has created a precedent with the introduction of the “kitchen test,” a stricter definition that may disqualify many people from claiming this exemption. With the recent changes to these two sections of the Income Tax Act, individuals who are considering selling their property to purchase a new home could save thousands of Rupees in taxes if they understand them properly.

The Basic Framework: What Remains the Same

Both Section 54F and Section 86 grant the same tax exemption for individuals and/or Hindu Undivided Families (HUF) when they sell long-term capital assets and use the proceeds to purchase a new Residential property in India. The fundamental concepts of the two sections are identical:

I. Eligibility: You must sell a long-term capital asset (for purposes of these two sections, a Long-Term Capital Asset is a capital asset other than a residential house) such as land, stock or commercial property and reinvest those proceeds in "one residential property in India".

II. Timelines: You may purchase the new property within 1 year prior to, or within 2 years after, the date you sell your Long-Term Capital Asset, or you may build the new property within 3 years after you sold your Long-Term Capital Asset.

III. Calculation of the Exemption: If the new residential property you purchased equals or exceeds the net sale amount of the property sold you will receive the full exemption. If the new residential property cost is less than the net sale amount of the property sold you will receive a proportionate exemption.

IV. Where to Deposit Funds: If you did not use the capital gains before filing a tax return, deposit these funds to a designated bank account under the Capital Gains Account Scheme.

The Change: ₹10 Crore Cap in Section 86

One of the significant differences between Section 86 and Section 54 is that Section 86 has introduced two new provisions that will fundamentally change the way you do business when it involves high-value property transactions.

1. Section 86(8) - Cost of New Asset Cap: In regard to a high-value residential property purchase over ₹10 Crore, the only cost of the new residential home that can be considered when determining exemption amounts is ₹10 Crore.

2. Section 86(9) - Net Consideration Cap: If your property was sold for a price exceeding ₹10 Crore, any consideration exceeding that amount will not apply towards any deposit requirement under Section 86(2).

The Kitchen Test: One House or Multiple Houses?

Under Section 54F and Section 86, an important question is, what exactly is one property? Both provisions outline the principle that to qualify for a tax deduction under either section you cannot have any other property other than the new asset flagged under the provision as of the date of transfer.

The Ram Kishore Seth (supra) case on 16th December 2025 brought clarity to this issue by establishing the “Kitchen Test.” In this case, the assessee owned three separate but adjacent residential properties with three different floors of three independent units at Karol Bagh and Pitampura, and he attempted to claim ₹1.22 crore as a deduction under Section 54F on a sale value of ₹2.29 crore for a unit at the Pitampura location. However, the Tribunal disallowed this claim.

The rationale for the Tribunal’s ruling was that the assessee received rental income from the three floors at Karol Bagh, and they were not just separate floors but three separate properties. It was determined that independent residential units can be determined solely by their own kitchens rather than just their respective floors. Thus, the fact that at the time of transfer the assessee had a number of independent properties and met the definition of independent residential units, he was ineligible for a deduction.

Kitchen Test Principle: A residential house is one building that has a common kitchen and common facilities. Multiple units (regardless if they are all located in the same building) having their own kitchens will be treated as separate residential houses for the purpose of Section 54F/86.

Tribunal Standard: “What’s most important when determining the definition of an independent residential house...there must be a common kitchen and the number of units could differ.” This rule applies to functional independence instead of being separated physically.

What Constitutes "One" vs "Multiple" Residential Houses

The Ram Kishore Seth ruling and the most current case law indicate the developing standard of law:

1. ONE Residential House:

1. Is one structure with shared kitchen and facilities
2. May consist of multiple levels and/or units built as one integrated project
3. Has an organic unity with common facilities
4. Is connected by a common entrance, a common stairway, and a common compound wall
5. If members of the same family occupy different floors, this does not negate the one-house definition

II. MUTLIPLE Residential Houses:

1. Are separate units with kitchens independent of one another
2. Are functionally independent (that is, each can operate separately)
3. Contain a room, a hall, and a kitchen (RHK) for each unit
4. Generate separate rental revenues from each unit
5. Have separate utility services and separate entrance(s).

Takeaways

1. For Affluent Homeowners: Section 86 is virtually identical to Section 54F and the ₹10 Crore limit on individual investments should not affect you. The main concern is satisfying the "one house" test, which requires you not to hold investments in multiple properties with separate kitchens upon sale.

2. For Buyers of Luxury Homes: The ₹10 Crore cap is now an added barrier to purchasing a property above this amount, if you will be purchasing a home above this price point, you should seek the advice of an accountant/tax specialist on structuring your transaction so that you receive the maximum allowable exemption on any potential tax liabilities. You might only qualify for a partial exemption, even with full re-investment of the sale proceeds, unless the transaction has been set up correctly.

3. For Owners of Multiple Properties: An owner of many units, even those located within the same complex, that have their kitchens and receive rental income would not be entitled to the Section 54F and 86 benefits. Before selling your capital assets, it may be advisable to restructure the way in which you hold the units.

The way in which the law has transitioned from Section 54F to Section 86 is one of continued evolution through calculation. The basic structure of the exemptions continue to be the same, however, the introduction of the limit of ₹10 crores creates a new limit on tax benefits to high-value transactions. Additionally, a recent case of Ram Kishore Seth (supra) has shown that the provision requiring there be only "one residential house" is being taken very seriously, and that the kitchen test may disqualify many people who thought their multiple floors were part of one house.

As a result, prior to claiming any exemptions under Section 86, you should take a close look at all of your properties and understand what it means to be considered "one house". You should also consult a qualified tax advisor if you are dealing with multiple units, Joint Development Agreements, or transactions of more than ₹10 crores.

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