Short answer: The capital gains exemption on sale of house property sits in s.82 of the Income-tax Act, 2025. If you held the flat over 24 months, you can avoid tax on the gain by buying a home within one year before or two years after the sale, or building within three. You reinvest the gain, not the full price.
- Gain, not price: s.82 only needs the new home to cost at least as much as your long-term gain. Most upgrades clear that easily.
- Three windows: buy up to one year before the sale, buy up to two years after it, or build within three years.
- The return deadline matters: gain not yet spent on the new home by your return due date must go into the Capital Gains Account Scheme first.
- Delays cost tax: deposited money not used within three years of the sale is taxed in the year that period ends.
- Hold the new home three years: sell it sooner and its cost is cut by the exempted gain.
- Our STEP check: size the gain, time the windows, exemption route, park in CGAS.
- Which law applies to a sale in 2026?
- How does the s.82 exemption work?
- Is buying an under-construction flat "purchase" or "construction"?
- What's the Capital Gains Account Scheme for?
- Worked example 1: a straightforward upgrade
- Worked example 2: an under-construction flat that runs late
- Should you sell first or buy first?
- What if you're selling a plot or something other than a house?
- What about the bond route?
- The STEP check (our framework)
- Checklist before you sell to upgrade
- What mistakes do sellers make?
- What should you do if...
- Method notes and limits
- Related reading
- Frequently asked questions
- Talk it through with acre&key
- Sources
Most Bengaluru upgrades follow the same path: a 2BHK bought some years ago, a growing family, and a bigger flat that costs more than the old one sells for. The tax question is whether the profit on the old flat gets taxed on the way. Usually it doesn't have to, if you get the timing right. This piece covers the upgrade case only. For how the gain itself is worked out, see our guide to capital gains tax on selling a flat.
Which law applies to a sale in 2026?
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 (PIB). The old s.54 relief for reinvesting in a house is now s.82, and the old s.54EC bond route is s.85. The ideas carry over, but the section numbers in your CA's working and your return will be the new ones (Income-tax Act, 2025 as amended).
Two facts decide everything else:
- How long you held it. Over 24 months makes the gain long-term. Only long-term gains qualify for s.82.
- What you sold. s.82 is for a residential house. Selling a plot, a shop or shares to fund a home falls under s.86, which works differently (see below).
How does the s.82 exemption work?
The text of s.82 is short. If an individual or HUF has a long-term gain from selling a residential house, and buys one residential house in India within one year before or two years after the sale, or builds one within three years, then:
- If the new home costs at least as much as the gain, no capital gains tax is charged.
- If the gain is bigger than the new home's cost, only the excess is taxed.
Three further rules shape real decisions:
- Two houses, once. If the gain is ₹2 crore or less, you can choose to buy or build two houses instead of one. You get that option once in your life.
- A ₹10 crore cap. New-home cost above ₹10 crore doesn't count toward the exemption.
- A three-year hold. Sell the new home within three years and, when working out that sale's gain, its cost is reduced by the gain you exempted earlier.
| Rule | What it says | Why it matters for an upgrade |
|---|---|---|
| Original asset | Residential house, long-term (held over 24 months) | A flat held under 24 months gets no s.82 relief |
| Buy window | One year before to two years after the sale | You can buy first, as long as the sale follows within a year |
| Build window | Within three years after the sale | Matters if the new home is being built |
| Amount | Cost of new home vs your gain | You reinvest the gain, not the sale price |
| CGAS | Unspent gain deposited by the return due date | Lets you keep the exemption while you look or while a flat is built |
| Lock-in | Hold the new home three years | An early resale claws the benefit back |
| Two-house option | Gain up to ₹2 crore, once in a lifetime | Useful if you're buying a flat for parents too |
Is buying an under-construction flat "purchase" or "construction"?
This is the question we hear most, and it changes your deadline. Treated as a purchase, you'd have two years from the sale. Treated as construction, you'd have three. s.82 itself doesn't say which applies to a flat booked with a builder, so it's a point to settle with your CA before you book.
Either way, plan for slippage. Possession dates in Bengaluru often move. In our analysis of the Karnataka RERA register for east Bengaluru, a large share of projects were past their declared completion date (see do east Bengaluru projects deliver on their RERA date?). If the flat isn't done within the window, the unspent part of your deposit can become taxable (Example 2).
What's the Capital Gains Account Scheme for?
If you haven't spent the gain on a new home by the time you file your return, s.82(2) says you must deposit the unspent amount in a specified bank under the government scheme, before the return due date, and attach proof with the return. That deposit counts as cost of the new home for the exemption.
The catch is s.82(4). Whatever is still unused when three years from the sale run out is taxed in that tax year, and you can then withdraw it. So the scheme buys you time; it doesn't remove the deadline.
Worked example 1: a straightforward upgrade
You bought a 2BHK in August 2024 for ₹80 lakh. In October 2026, after 26 months, you sell it for ₹1.1 crore and buy a ₹1.6 crore 3BHK. All figures are illustrative, and we've ignored brokerage and other transfer costs, which would cut the gain.
| Step | Amount |
|---|---|
| Sale price | ₹1,10,00,000 |
| Purchase cost (bought after 23 July 2024, so no indexation option) | ₹80,00,000 |
| Long-term gain | ₹30,00,000 |
| Tax without relief: 12.5% plus 4% cess (no surcharge assumed) | ₹3,90,000 |
| New home cost | ₹1,60,00,000 |
| Is new home cost ≥ gain? | Yes |
| Tax after s.82 | Nil |
The point most sellers miss: you only had to put ₹30 lakh, not ₹1.1 crore, into the new home. The rest of the sale money is free to repay the old loan or fund the down payment.
Now the cash side. Government charges on the new flat at 7.6% are ₹12,16,000 (full cost guide). RBI caps the loan at 75% above ₹75 lakh, so at most ₹1.2 crore, and lenders don't fund stamp duty on loans above ₹10 lakh (RBI Master Circular). You'd need ₹40 lakh plus ₹12.16 lakh, or ₹52.16 lakh, from the sale proceeds and savings. Check your old flat's outstanding loan before you count on the full ₹1.1 crore.
Check that the new flat's agreement value isn't well below its guidance value. If guidance value is more than 110% of your price, it's treated as the price for the seller's tax (guidance value vs market price), and stamp duty is charged on the higher of the two.
Worked example 2: an under-construction flat that runs late
You sell a flat in October 2026 with a long-term gain of ₹60 lakh. You book a ₹1.5 crore under-construction flat. By your return due date you've paid ₹45 lakh in instalments. Illustrative figures again.
| Step | Amount |
|---|---|
| Long-term gain | ₹60,00,000 |
| Spent on the new flat by the return due date | ₹45,00,000 |
| Gain still unspent | ₹15,00,000 |
| Deposit into the Capital Gains Account Scheme | ₹15,00,000 |
| Used from the deposit within three years of the sale | ₹5,00,000 |
| Unused when three years end (October 2029) | ₹10,00,000 |
| Tax on the unused amount: 12.5% plus 4% cess | ₹1,30,000 |
Without the deposit, ₹15 lakh would have been taxed at the outset (₹1,95,000 at the same rate). With it, you only lose relief on what the delay left unused. If the flat were done on time and the full ₹15 lakh drawn, the tax would be nil. That's why the builder's payment-plan timing, and your RERA delay rights, matter to your tax as well as your move-in date (refund vs interest under RERA s.18).
Should you sell first or buy first?
s.82 allows both, so the decision is about cash and risk, not tax.
| Sell first, then buy | Buy first, then sell within a year | |
|---|---|---|
| Tax position | Two years to buy (CGAS if needed) | Fine if the sale follows within one year |
| Cash pressure | Low: sale money in hand | High: you carry two homes or a bridge loan |
| Illustrative carrying cost | Rent ₹40,000 × 9 months = ₹3,60,000 | Interest on ₹60 lakh at 10% for 9 months = ₹4,50,000 |
| Main risk | Prices move while you look | The old flat sells slowly or below your estimate |
| Moves | Two (into a rental, then the new home) | One |
The 10% rate is illustrative only; ask lenders for real terms (20 questions to ask about home loans). If you buy first, track the one-year limit from the new home's purchase to the old flat's sale. Miss it and s.82 no longer fits.
What if you're selling a plot or something other than a house?
Then it's s.86, not s.82. The Income Tax Department's s.86 page uses the same buy and build windows for a residential house. The big difference, per an expert answer in Moneycontrol (news), is that s.86 asks you to invest the net sale consideration, not just the gain, for the full benefit. It also has conditions about other houses you own. Selling a plot to fund a flat is a CA conversation from the start.
What about the bond route?
s.85 lets you put up to ₹50 lakh of the gain into notified bonds within six months, redeemable after five years. It's a fallback when you sell but haven't found a home. For an upgrade it's usually the weaker choice: the money is locked for five years just when you need a down payment. You can combine routes, with your CA's help on the split.
The STEP check (our framework)
Run these four steps before you list the old flat:
- S: Size the gain. Sale price minus cost (and transfer costs), and for a pre-23 July 2024 purchase, both the 12.5% and the indexed 20% figures.
- T: Time the windows. Write down the sale date, the date one year before, two years after and three years after. Put your return due date on the same page.
- E: Exemption route. House (s.82), bonds (s.85), or both. For a non-house asset, s.86.
- P: Park in CGAS. Any gain not spent on the new home by the return due date goes into the deposit scheme, with proof attached to your return.
Checklist before you sell to upgrade
- [ ] Old flat held over 24 months on the planned sale date
- [ ] Long-term gain worked out, with both options if bought before 23 July 2024
- [ ] All four dates noted: one year before, two and three years after, return due date
- [ ] Under-construction booking: CA view on purchase vs construction window
- [ ] Builder's payment plan compared with the three-year limit
- [ ] Capital Gains Account Scheme deposit planned for any unspent gain
- [ ] New home's agreement value checked against guidance value on Kaveri
- [ ] Old loan's outstanding amount and closure letter arranged
- [ ] Cash for 7.6% charges and the down payment confirmed
- [ ] Plan to hold the new home at least three years
What mistakes do sellers make?
- Reinvesting the whole sale price because they think it's required, and leaving no cash buffer.
- Missing the return-date deposit. Spending part of the gain and forgetting to deposit the rest before the due date.
- Booking a slow project without checking how its payment plan lines up with the three-year limit.
- Selling the new flat early. A resale within three years claws the benefit back.
- Using s.82 for a plot sale. A plot isn't a residential house; that's s.86.
- Forgetting the old flat's TDS paperwork. The buyer deducts TDS; make sure it shows against your PAN before you file.
What should you do if...
...the new flat won't be ready within three years? Get your CA to work out how much of the deposit you can realistically use in time, and what tax applies to the rest. Your RERA rights to interest or a refund are separate.
...the gain is more than the new home's price? Only the excess is taxed. Consider s.85 bonds for part of it within six months.
...you bought the old flat before 23 July 2024? If you bought before that date, compare 12.5% with 20% after indexation first; a smaller gain means less to reinvest.
...you want to buy for your parents as well? If the gain is ₹2 crore or less, the two-house option may fit. It's once in a lifetime, so use it deliberately.
...the flat is jointly owned? Each co-owner works out their own share of the gain and their own exemption. See joint home loan and co-owner rules.
...you inherited the flat you're selling? The holding period and cost can include the previous owner's. Get the papers in order first (inherited flat sale documents).
Method notes and limits
- The law is from the text of s.82 on India Code and the Income Tax Department's copy of the Act as amended by the Finance Act 2026. We read s.82 directly; the s.86 and bond points are summaries.
- Worked examples use illustrative prices, a 4% cess and no surcharge. Real cases depend on your income, transfer costs, and whether you bought before 23 July 2024.
- We haven't stated rules for the return due date, or how a loan-funded purchase interacts with s.82; those depend on your facts.
- The 10% bridge rate is illustrative, not a quote.
- Moneycontrol is a news source and is labelled as such.
CA note: This page is general information on tax, not tax advice. Capital gains, exemptions and deposit timing depend on your facts. Confirm with your CA before you sell or book.
Related reading
Frequently asked questions
No. Under s.82 you only need the new home to cost at least as much as your long-term capital gain. If it costs less, only the difference is taxed.
Yes. s.82 allows a purchase up to one year before the sale. Just make sure the old flat actually sells within that year.
Two years to buy a home, or three years to build one. Any gain not used by your return due date must be deposited in the Capital Gains Account Scheme to keep the exemption.
It can, but whether it counts as a purchase (two years) or construction (three years) affects your deadline. s.82 doesn't spell this out for builder flats, so confirm with your CA before booking.
The unused part is taxed as capital gains in the tax year in which three years from the sale end. You can then withdraw it.
You can, but if you sell it within three years, its cost is reduced by the gain you exempted, so the tax comes back on that sale.
Yes. New-home cost above ₹10 crore doesn't count toward the exemption.
Once in your life, if your gain is ₹2 crore or less, you can choose to buy or build two residential houses instead of one.
Sources
- Income-tax Act, 2025, s.82 (India Code): https://indiacode.ecourtsindia.com/income-tax-act-2025/section/82/
- Income Tax Department, Income-tax Act, 2025 as amended by the Finance Act 2026: https://www.incometaxindia.gov.in/documents/d/guest/income_tax_act_2025_as_amended_by_fa_act_2026-pdf
- Income Tax Department, Section 86: https://www.incometaxindia.gov.in/w/section-86-113
- PIB, Income-tax Act, 2025 in force from 1 April 2026: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2248005&lang=1®=3
- RBI Master Circular, Housing Finance (LTV, stamp duty): https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=12824
- Income Tax Department, Capital gain overview: https://www.incometaxindia.gov.in/w/capital-gain
- Moneycontrol (news), selling a new house within three years after claiming exemption: https://www.moneycontrol.com/news/business/personal-finance/sold-your-new-house-within-3-years-after-claiming-capital-gains-exemption-here-s-what-happens-to-your-tax-benefit-13999117.html
