I have been a non-resident Indian (NRI) for the last 20 years. I own three houses in Pune. I intend on selling the first two flats and the expected value is around INR 1.3 crore, of which long-term capital gains (LTCG) tax will be around INR 30 lakh after indexation. If I reinvest only LTCG for buying a new house (maybe around INR 60 lakh in value), will my remaining principal amount become tax-free?

Capital gains from the sale of a house property may be claimed as exempt from tax when they are invested for the purchase or construction of another house property. This exemption has been laid down under Section 54 of the Income-tax Act. The benefits of this section are also available to NRIs. To be able to claim this exemption, you are required to invest your capital gains. If the entire capital gains earned are not invested, the balance uninvested capital gains shall be taxable at 20% after allowing for indexation of the cost of acquisition. Therefore, there is no restriction on how much you can invest. Also, there is no requirement to invest the entire sales proceeds under this section. But do note that any capital gains that remain uninvested shall be taxed at 20% after allowing for indexation.

Section 54 requires that a property may be purchased one year before or two years after or constructed within three years from the date of sale. The new property must be situated in India. Exemption under Section 54 is available on the sale of one or more houses, where the capital gains are invested to purchase one house property within the time limits and other conditions laid down under Section 54.

There have been several cases before the income tax authorities where the taxpayer has been allowed to claim exemption on capital gains on the sale of two properties when they are reinvested to purchase a single house property. You are required to hold the new property for a period of three years; if sold before three years, the entire capital gains shall be taxed in the year of sale.

In case you do not plan to purchase another house property, you may choose to do any of the following. Invest the capital gains in capital gains exemption bonds as per Section 54EC of the Act. The maximum amount allowed to be invested is INR 50 lakh in a financial year. These bonds have a lock-in period of five years.

If you want to invest your capital gains in a new business, you may be eligible to claim exemption as per Section 54GB of the Act. This section allows you to claim exemption on the capital gains from the sale of a house property when it’s reinvested in equity shares of an eligible new company, which then purchases a specified asset, provided all the conditions laid down under Section 54GB are met.