Section 54 Exemption After 1 April 2026: Old Act vs Income-tax Act, 2025 Transition Explained

A taxpayer may have claimed a residential-house capital-gains exemption under section 54 of the Income-tax Act, 1961 before that Act was repealed, yet breach the exemption conditions only after the Income-tax Act, 2025 came into force on 1 April 2026. The new law expressly addresses this cross-over. The old exemption does not vanish, and neither does the old lock-in condition. Instead, section 536(2)(h) of the Income-tax Act, 2025 preserves the old condition and taxes the consequence in the later tax year in which the breach occurs.

This is not merely a section-number change. For fresh transactions governed by the 2025 Act, the residential-house exemption corresponding to old section 54 is contained in section 82. But for exemptions already earned under the 1961 Act, the saving clause creates a specific bridge between the two statutes.

Old law — Section 54 of the Income-tax Act, 1961

Section 54 allowed an individual or HUF to claim exemption from long-term capital gains arising on transfer of a residential house where the capital gain was reinvested in another residential house in India within the prescribed purchase or construction window. Among the important conditions was the three-year consequence attached to an early transfer of the new house. The exemption therefore came with continuing post-claim obligations; it was not an unconditional one-time relief.

For transfers and exemptions relating to tax years beginning before 1 April 2026, those rights and obligations continue to be tested under the 1961 Act even after repeal.

New law — Section 82 and the saving rule in section 536

Section 82 of the Income-tax Act, 2025 is the new residential-house capital-gains exemption provision for transactions governed by the new Act. The core reinvestment framework remains substantially familiar: qualifying long-term gains of an individual or HUF can be sheltered where the statutory purchase or construction conditions are satisfied, and consequences continue to attach if the new asset is transferred within the specified period.

The more important transition provision is section 536(2)(h). Where a deduction or exemption was allowed under the repealed 1961 Act subject to conditions, and those conditions are breached after commencement of the 2025 Act, the amount that would have become taxable because of that breach is brought to tax in the tax year in which the breach occurs. The underlying trigger and quantum remain linked to the old provision that originally granted the benefit.

What actually changed?

• Fresh residential-house exemption claims for Tax Year 2026-27 onward are governed by section 82 of the Income-tax Act, 2025 rather than section 54 of the 1961 Act.

• A post-1 April 2026 breach of conditions attached to an exemption originally claimed under the 1961 Act is expressly dealt with by section 536(2)(h) of the 2025 Act.

• The later-year tax consequence is recognised under the 2025 Act, while the trigger and amount of the clawback are determined by reference to the old-law exemption conditions.

• This creates a dual-law transition analysis: the original entitlement may belong to the 1961 Act, while the year of later taxability falls under the 2025 Act.

What did NOT change?

• Repeal does not cancel a valid section 54 exemption already earned under the 1961 Act.

• Repeal does not erase the lock-in or utilisation conditions attached to the old exemption.

• A taxpayer cannot avoid clawback merely because the breach occurs after the old Act has been repealed.

• The corresponding new-law provision continues the residential-house reinvestment concept rather than replacing it with a fundamentally different exemption policy.

Worked example: house bought before repeal and sold after 1 April 2026

Assume an individual sold a long-term residential house in February 2025 and validly claimed exemption under section 54 of the Income-tax Act, 1961 after purchasing another residential house in March 2025. The new house is then sold in May 2027, within the relevant three-year period attached to the original exemption.

The original section 54 claim remains a 1961 Act claim. However, the breach occurs in Tax Year 2027-28, when the Income-tax Act, 2025 is in force. Section 536(2)(h) bridges the two laws. The triggering condition and the amount to be brought back are determined by reference to the old section 54 framework, while the resulting income is taxed in Tax Year 2027-28 under the 2025 Act.

The practical point is important: advisers should not analyse the May 2027 sale only by opening section 82 of the new Act. They must first identify whether the exemption being unwound arose under old section 54.

Capital Gains Account Scheme deposits also survive the transition

The same transition logic applies where capital gains were deposited under the Capital Gains Account Scheme before 1 April 2026 in connection with an old-law exemption. If the amount remains unutilised when the prescribed investment period expires after commencement of the new Act, the old exemption conditions continue to determine the consequence, while section 536(2)(h) brings the amount to tax in the later tax year in which the time limit expires.

For example, if an old-law transfer occurred in June 2024 and the relevant CGAS amount remains unutilised until the applicable deadline expires in June 2027, the tax event falls in Tax Year 2027-28. The old-law exemption framework determines why and how much is taxable; the 2025 Act governs the tax year in which the resulting income is recognised.

Why this matters for tax due diligence and compliance

• Maintain a schedule of exemptions claimed before 1 April 2026 that carry future lock-in, reinvestment or utilisation conditions.

• For each later asset sale or deadline expiry, identify the statute under which the original benefit arose before computing the clawback.

• Do not assume that an old section reference is obsolete merely because the breach occurs after repeal; section 536 deliberately preserves these consequences.

• Businesses undergoing restructurings should perform the same exercise for old-law deductions and exemptions with continuing post-transaction conditions.

• Tax return workpapers for Tax Year 2026-27 onward should document both the old provision creating the obligation and the 2025 Act provision recognising the later-year consequence.

Old section 54 vs new section 82 — quick comparison

Old law: section 54 of the Income-tax Act, 1961 governed qualifying residential-house reinvestment exemptions for earlier years. New law: section 82 of the Income-tax Act, 2025 governs the corresponding exemption for new-law tax years. Transition: section 536(2)(h) preserves and taxes later breaches of conditions attached to benefits originally granted under the repealed Act.

Effective and transition position

The Income-tax Act, 2025 came into force on 1 April 2026. Tax years beginning before that date remain governed by the 1961 Act where the saving provisions apply. Therefore, the correct question is not simply 'Which Act is in force on the date of sale?' The better question is 'Under which Act did the original exemption arise, and in which tax year did the later breach occur?'

Practical checklist

• Identify the date and tax year of the original asset transfer.

• Confirm whether the exemption was claimed under section 54, 54B, 54F or another old-law provision.

• Record the date of acquisition or construction of the replacement asset and the relevant lock-in period.

• Check whether any CGAS amount remains unutilised and when its statutory utilisation period expires.

• If the breach occurs after 1 April 2026, apply the relevant section 536 saving rule before deciding the tax treatment.

• Preserve old return, computation and exemption documentation because the quantum may still depend on the repealed provision.

Related PGT & Associates analysis

For the broader transition from assessment year/previous year terminology to the Tax Year framework, see: https://www.pgtandassociates.com/post/tax-year-vs-assessment-year-income-tax-act-2025

For how legacy proceedings can continue under the repealed statute, see: https://www.pgtandassociates.com/post/reassessment-income-tax-act-2025-vs-1961-section-281

Primary sources

• Income-tax Act, 2025 as amended — section 82 (profit on sale of property used for residence) and section 536 (repeal and saving provisions).

• Income Tax Department, Set off/Carry forward of Losses FAQs — transition treatment of deductions, capital-gains exemptions and CGAS amounts after 1 April 2026.

• Income Tax Department, Objective and scope of the New Act FAQs — commencement on 1 April 2026 and preservation of earlier-year rights, liabilities and proceedings.

Conclusion

The most important transition point is that repeal does not wipe the slate clean. A section 54 exemption earned under the Income-tax Act, 1961 can continue to carry conditions beyond 31 March 2026. If those conditions are breached later, section 536 of the Income-tax Act, 2025 ensures the consequence survives. Fresh claims move to the new section 82 framework, but legacy claims must still be traced back to the provision that originally granted the relief.

PGT & Associates can assist with capital-gains computations, transition reviews and documentation where old-law exemptions, CGAS balances or post-1 April 2026 transactions overlap.

Disclaimer: This article is for general informational purposes only and does not constitute tax or legal advice. The application of the transition provisions depends on the specific facts, dates and statutory conditions of each case.