Taxation - DT Ch 06: Capital Gains - Test 5: answer key

Question 1 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. Smt. Anuradha Sen, a resident individual, sold her residential house situated in Mumbai on 15 September 2026 for ₹2,85,00,000. The property had been held as a long-term capital asset and was used for residential purposes. After considering the eligible acquisition cost and transfer expenses, her long-term capital gain amounted to ₹1,80,00,000. She intends to reinvest the proceeds in residential properties in India. On 10 September 2025, Anuradha purchased a residential house in Hyderabad for ₹72,00,000. Subsequently, on 10 March 2028, she purchased another residential house in Pune for ₹58,00,000. Both properties are situated in India and are intended for residential use. She did not construct either property. She has elected to claim exemption in respect of the Hyderabad property for the current transfer. Anuradha had also sold a residential property in T.Y. 2023-24 and, at that time, exercised the option available under section 54 to claim exemption in respect of two residential houses in India. The exemption was validly claimed in that year. She has no intention of selling the Hyderabad property immediately and has retained the relevant acquisition and transfer documents. Her tax consultant must now determine whether the current investment qualifies under section 54, whether the two-house option can be exercised again, and the extent of exemption available. The consultant is also required to examine the separate time limits applicable to purchases made before and after the original transfer. Assume that the entire capital gain of ₹1,80,00,000 has been computed correctly, no other exemption is claimed, and the cost of the Hyderabad property is the only investment considered for the present section 54 claim.

Anuradha's capital gain is ₹1,80,00,000. Although this amount does not exceed ₹2 crore, she had already exercised the two-residential-house option under section 54 in T.Y. 2023-24. What is the position for the current transfer?

1. She cannot exercise the two-house option again; only one qualifying house can be considered. (correct answer)
2. She can claim exemption for both houses because each investment falls within the time limit.
3. She can claim two houses again because the earlier option related to a different property.
4. She cannot claim any exemption because she has already exercised the two-house option.

Answer: A — She cannot exercise the two-house option again; only one qualifying house can be considered.

Explanation. Section 54 permits the two-house option where LTCG does not exceed ₹2 crore, but this option can be exercised only once in the assessee's lifetime. Anuradha's current gain is ₹1.80 crore, satisfying the monetary condition. However, she exercised the option in T.Y. 2023-24. Consequently, she cannot use it again. She may still claim exemption for one qualifying residential house in India, subject to the other statutory conditions.

Where it goes wrong. Assuming that the ₹2 crore condition independently permits the two-house option every time an eligible residential property is transferred.

Authority. Section 54(1) of the Income-tax Act, 1961

Question 2 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Anuradha elects to claim exemption in respect of her Hyderabad house purchased for ₹72,00,000. Her capital gain is ₹1,80,00,000, and she has already exercised the two-house option in an earlier tax year. Determine the exemption currently available under section 54.

1. ₹1,30,00,000, being the combined cost of both houses.
2. ₹72,00,000, being the cost of the selected qualifying house. (correct answer)
3. ₹1,80,00,000, being the entire long-term capital gain.
4. Nil, because the two-house option was exercised earlier.

Answer: B — ₹72,00,000, being the cost of the selected qualifying house.

Explanation. The two-house option cannot be exercised again, but the ordinary one-house exemption remains available. The eligible new-house cost is ₹72,00,000. Section 54 allows the lower of the long-term capital gain or qualifying investment. Comparison: capital gain = ₹1,80,00,000; new-house cost = ₹72,00,000. Exemption = lower amount = ₹72,00,000. The Pune house is not included in the present claim.

Where it goes wrong. Treating previous exercise of the two-house option as a complete bar on ordinary section 54 exemption.

Authority. Section 54(1) of the Income-tax Act, 1961

Question 3 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Compute the long-term capital gain remaining chargeable after allowing the section 54 exemption for Anuradha's Hyderabad house. Assume the eligible investment is ₹72,00,000 and no other deduction or exemption is claimed.

1. ₹72,00,000.
2. ₹1,80,00,000.
3. ₹1,08,00,000. (correct answer)
4. ₹1,30,00,000.

Answer: C — ₹1,08,00,000.

Explanation. Long-term capital gain before exemption = ₹1,80,00,000. Eligible section 54 exemption = ₹72,00,000, being the lower of capital gain and eligible investment. Remaining chargeable LTCG = ₹1,80,00,000 − ₹72,00,000 = ₹1,08,00,000. The second property's purchase cost does not enter the exemption computation because Anuradha cannot exercise the two-house option again.

Where it goes wrong. Deducting the combined investment of ₹1.30 crore despite the earlier exercise of the one-time two-house option.

Authority. Section 54(1) of the Income-tax Act, 1961

Question 4 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Examine the purchase dates of Anuradha's two replacement houses. Her original residential house was transferred on 15 September 2026. Determine whether the Hyderabad purchase and Pune purchase independently satisfy the purchase-period conditions under section 54.

1. Only Hyderabad qualifies because Pune was purchased after the transfer.
2. Only Pune qualifies because Hyderabad was purchased before the transfer.
3. Neither qualifies because both purchases must occur after the transfer.
4. Both purchases satisfy the respective statutory purchase-period conditions. (correct answer)

Answer: D — Both purchases satisfy the respective statutory purchase-period conditions.

Explanation. Section 54 permits purchase within one year before or two years after transfer. Original transfer date is 15 September 2026. Hyderabad was purchased on 10 September 2025, five days before the one-year boundary. Pune was purchased on 10 March 2028, within two years after transfer. Both purchases satisfy the respective timing requirements. However, the one-time restriction still prevents claiming exemption for both houses in the current case.

Where it goes wrong. Assuming that a residential house must necessarily be purchased after the transfer date to qualify under section 54.

Authority. Section 54(1) of the Income-tax Act, 1961

Question 5 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. Aryan Steels Ltd. sold an industrial land parcel held as a long-term investment on 15 November 2026. The land was not stock-in-trade and had never formed part of a depreciable block. After deducting the eligible acquisition and improvement costs and transfer expenditure, the company computed long-term capital gains of ₹68,00,000. The company's finance director decided to invest a part of the gains in specified long-term bonds. On 10 January 2027, the company invested ₹35,00,000 in bonds issued by the Rural Electrification Corporation Limited (REC). These bonds are redeemable after five years and fulfil the relevant statutory conditions. On 10 May 2027, it invested a further ₹25,00,000 in qualifying bonds issued by the National Highways Authority of India (NHAI). Both investments were made within six months of the transfer of the original land. The company has not made any other investment under section 54EC from the gains arising on this transfer. The finance director proposes to claim exemption for the entire ₹60,00,000 invested. The company also proposes to retain the bonds for their full redemption period. However, during a subsequent restructuring, the company obtains a bank loan on 1 January 2030 by furnishing both bond holdings as security. The bonds have not been sold, transferred or converted before that date. The company's tax adviser must determine the eligible exemption, the statutory investment ceiling, the remaining taxable capital gain and the consequences of obtaining a loan against the specified bonds before expiry of the prescribed holding period. Assume all investments are genuine and all bonds satisfy the applicable issuer and maturity requirements.

Determine the maximum deduction available to Aryan Steels Ltd. under section 54EC for the investments of ₹35,00,000 in REC bonds and ₹25,00,000 in NHAI bonds. Both investments were made within six months and satisfy the bond maturity conditions.

1. ₹50,00,000, being the statutory aggregate investment ceiling. (correct answer)
2. ₹60,00,000, being the total amount actually invested.
3. ₹35,00,000, being the first qualifying investment.
4. ₹68,00,000, being the entire capital gain.

Answer: A — ₹50,00,000, being the statutory aggregate investment ceiling.

Explanation. The LTCG is ₹68,00,000 and the total specified-bond investment is ₹35,00,000 + ₹25,00,000 = ₹60,00,000. However, section 54EC restricts the maximum eligible investment to ₹50,00,000. Deduction is the lower of capital gain and eligible investment. Therefore, exemption = lower of ₹68,00,000 and ₹50,00,000 = ₹50,00,000. Remaining taxable LTCG = ₹18,00,000.

Where it goes wrong. Assuming that the exemption automatically equals the aggregate amount invested whenever all bond purchases are within six months.

Authority. Section 54EC(1) of the Income-tax Act, 1961

Question 6 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Aryan Steels Ltd. transferred its industrial land on 15 November 2026. It purchased REC bonds on 10 January 2027 and NHAI bonds on 10 May 2027. Both bond issues are redeemable after five years. Determine the treatment of the investment dates under section 54EC.

1. Only the January investment qualifies because May falls in the next financial year.
2. Both investments qualify because they are within six months of the transfer. (correct answer)
3. Only the May investment qualifies because it is nearer to the six-month boundary.
4. Neither qualifies because the investment must be made in the transfer month.

Answer: B — Both investments qualify because they are within six months of the transfer.

Explanation. The six-month investment period runs from 15 November 2026 to 15 May 2027. REC investment on 10 January 2027 is within this period. NHAI investment on 10 May 2027 is also within the period. Both bonds satisfy the stated five-year redemption condition. Therefore, both investments qualify by timing, although the aggregate eligible investment remains restricted to ₹50,00,000 under section 54EC.

Where it goes wrong. Treating the end of the financial year as the deadline instead of calculating the six-month period from the transfer date.

Authority. Section 54EC(1) of the Income-tax Act, 1961

Question 7 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

After allowing the maximum deduction under section 54EC, calculate the remaining long-term capital gain arising from the transfer of Aryan Steels Ltd.'s industrial land. The original gain was ₹68,00,000 and the company invested ₹60,00,000 in qualifying bonds within six months.

1. ₹8,00,000.
2. ₹10,00,000.
3. ₹18,00,000. (correct answer)
4. ₹28,00,000.

Answer: C — ₹18,00,000.

Explanation. Total investment = ₹35,00,000 + ₹25,00,000 = ₹60,00,000. Section 54EC limits the investment considered for deduction to ₹50,00,000. The original LTCG is ₹68,00,000. Therefore, exemption = ₹50,00,000 and taxable LTCG = ₹68,00,000 − ₹50,00,000 = ₹18,00,000. The excess ₹10,00,000 invested does not generate any additional section 54EC deduction.

Where it goes wrong. Deducting the entire ₹60,00,000 invested rather than applying the statutory ₹50,00,000 ceiling.

Authority. Section 54EC(1) and Section 54EC(2) of the Income-tax Act, 1961

Question 8 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Aryan Steels Ltd. obtained a bank loan on 1 January 2030 by furnishing all the REC and NHAI bonds acquired under section 54EC as security. The bonds had not been transferred or redeemed. What is the consequence of this action, considering the five-year restriction?

1. No consequence arises because the company continues to own the bonds.
2. Only the interest on the bank loan becomes taxable as capital gains.
3. The exemption is restored after the bonds are redeemed after five years.
4. The previously exempted ₹50,00,000 becomes LTCG in the violation year. (correct answer)

Answer: D — The previously exempted ₹50,00,000 becomes LTCG in the violation year.

Explanation. Section 54EC requires that specified bonds must not be transferred, converted or used as security for a loan or advance within five years from acquisition. Here, the entire bond investment is pledged on 1 January 2030, within five years of both acquisitions. Consequently, the capital gain previously allowed as exemption, ₹50,00,000, becomes chargeable as long-term capital gain in the tax year in which the loan is obtained.

Where it goes wrong. Assuming that retaining legal ownership of bonds prevents a violation when the bonds are used as security for a loan.

Authority. Section 54EC(2) of the Income-tax Act, 1961

Question 9 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. Mr. Vikram Malhotra, a resident individual, transferred a vacant plot of land situated in Jaipur on 2 December 2026. The plot had been held as a long-term capital asset and was not used as stock-in-trade. The actual sale consideration was ₹1,65,00,000. Brokerage and legal expenses incurred wholly and exclusively in connection with the transfer amounted to ₹5,00,000. After considering the eligible acquisition cost and other permitted adjustments, Vikram's long-term capital gain was ₹96,00,000. Accordingly, the net consideration from the transfer was ₹1,60,00,000. On the date of transfer, Vikram owned one residential house in India, which he had acquired several years earlier. He did not own any other residential house. On 15 July 2027, he purchased a new residential house situated in Pune for ₹80,00,000. The purchase was financed partly from the proceeds of the land transfer and partly through a housing loan. The new house is intended for residential occupation and satisfies the relevant statutory requirements. Subsequently, on 5 November 2028, Vikram purchased another residential house in India, separate from both the original house and the new house purchased in July 2027. He continued to retain the new house and did not transfer it during this period. Vikram's accountant proposes to claim exemption under section 54F and seeks advice on the appropriate investment ratio, the significance of owning one residential house on the transfer date, and the subsequent purchase of another residential house. Assume that no amount has been deposited in the Capital Gains Account Scheme and no other capital gains exemption has been claimed.

Compute Vikram's exemption under section 54F. His long-term capital gain is ₹96,00,000, net consideration is ₹1,60,00,000, and the cost of the new residential house purchased in India is ₹80,00,000.

1. ₹48,00,000. (correct answer)
2. ₹80,00,000.
3. ₹96,00,000.
4. ₹40,00,000.

Answer: A — ₹48,00,000.

Explanation. Under section 54F, exemption = LTCG × cost of new residential house ÷ net consideration. Substituting: ₹96,00,000 × ₹80,00,000 ÷ ₹1,60,00,000 = ₹96,00,000 × 1/2 = ₹48,00,000. Since the new-house cost is lower than net consideration, proportionate exemption applies. The remaining LTCG of ₹48,00,000 is chargeable before considering any other eligible adjustment.

Where it goes wrong. Applying section 54's lower-of-capital-gain-or-investment formula instead of the proportional formula under section 54F.

Authority. Section 54F(1) of the Income-tax Act, 1961

Question 10 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

On 2 December 2026, Vikram owned one residential house in India apart from the vacant plot that he transferred. He purchased another residential house on 15 July 2027. Is the ownership condition under section 54F satisfied on the date of transfer of the original asset?

1. No, because ownership of any existing residential house disqualifies him.
2. Yes, because he does not own more than one residential house. (correct answer)
3. No, because the new house must be purchased before the original transfer.
4. Yes, but only when the new property is outside India.

Answer: B — Yes, because he does not own more than one residential house.

Explanation. Section 54F requires that on the date of transfer, the individual or HUF should not own more than one residential house other than the new asset. Vikram owned one residential house on 2 December 2026. Therefore, he satisfies the ownership condition. His subsequent purchase of the qualifying new house on 15 July 2027 is within two years after transfer. The separate restriction concerning subsequent purchases must also be examined.

Where it goes wrong. Interpreting the ownership condition as requiring the assessee to own no residential house at all.

Authority. Section 54F(1) of the Income-tax Act, 1961

Question 11 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Vikram asks how much he would need to invest in a new residential house to obtain the entire exemption under section 54F, assuming the original net consideration remains ₹1,60,00,000. His capital gain is ₹96,00,000. Which amount is relevant for complete exemption, ignoring the statutory ₹10 crore ceiling?

1. ₹96,00,000, equal to the long-term capital gain.
2. ₹80,00,000, equal to his actual present investment.
3. ₹1,60,00,000, equal to the net consideration. (correct answer)
4. ₹1,65,00,000, equal to the gross sale consideration.

Answer: C — ₹1,60,00,000, equal to the net consideration.

Explanation. Section 54F requires investment of the net consideration for complete exemption. Net consideration = ₹1,65,00,000 − ₹5,00,000 transfer expenses = ₹1,60,00,000. The capital gain is only ₹96,00,000, but it is not the denominator for determining full investment. To obtain complete exemption, the eligible new-house cost must equal net consideration, subject to the ₹10 crore restriction. Hence, the required investment is ₹1,60,00,000.

Where it goes wrong. Assuming that investment of only the capital gain is sufficient for full section 54F exemption.

Authority. Section 54F(1) of the Income-tax Act, 1961; Section 54F(2) of the Income-tax Act, 1961

Question 12 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Vikram received section 54F exemption on the basis of his July 2027 residential-house purchase. On 5 November 2028, within two years of the original land transfer, he purchased another residential house apart from the qualifying new house. Determine the treatment of the exemption previously allowed.

1. The exemption remains valid because the new house is still held.
2. Only half the previous exemption becomes chargeable in the year.
3. The additional house purchase is ignored after the original exemption.
4. The entire earlier section 54F exemption becomes taxable as LTCG. (correct answer)

Answer: D — The entire earlier section 54F exemption becomes taxable as LTCG.

Explanation. Section 54F(2) withdraws the exemption where the assessee purchases another residential house, other than the new asset, within two years after transfer of the original asset. Vikram transferred the plot on 2 December 2026 and purchased the additional house on 5 November 2028. This falls within two years. Therefore, the earlier exemption of ₹48,00,000 becomes taxable as LTCG in the tax year of the additional purchase.

Where it goes wrong. Checking only the ownership position on the original transfer date and overlooking the subsequent-house purchase restriction.

Authority. Section 54F(2) of the Income-tax Act, 1961

Question 13 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Smt. Kavita sells a vacant residential plot held as an investment for twelve years and earns LTCG of ₹55,00,000. She purchases a residential house in India for ₹70,00,000 within two years after transferring the plot. She has never claimed a capital gains exemption before and satisfies the residential-house ownership conditions. Which provision is relevant for examining her claim?

1. Section 54F may apply because the original asset is not a residential house. (correct answer)
2. Section 54 applies because every plot is treated as a residential house.
3. Section 54EC alone applies because the original asset is immovable property.
4. Neither section 54 nor section 54F applies to a vacant plot.

Answer: A — Section 54F may apply because the original asset is not a residential house.

Explanation. Section 54 applies to transfer of a long-term residential house. Kavita transferred a vacant plot, not a residential house, so section 54 is unavailable. Section 54F specifically covers transfer of any long-term capital asset other than a residential house. The plot is eligible in principle. Since the qualifying residential house was purchased within two years after transfer and the ownership conditions are satisfied, she may examine proportionate or full exemption under section 54F.

Where it goes wrong. Classifying the original asset by the residential purpose of the replacement house instead of identifying the nature of the asset transferred.

Authority. Section 54 of the Income-tax Act, 1961; Section 54F(1) of the Income-tax Act, 1961

Question 14 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Nikhil transfers a residential house on 20 June 2026 and earns LTCG of ₹1,40,00,000. He purchases another residential house in India on 5 June 2027. Alternatively, he considers constructing a residential house, with construction completed on 19 June 2029. Assume both alternatives meet the other conditions of section 54. Which statement regarding the permitted timelines is correct?

1. Only a purchase within one year after transfer qualifies.
2. Both alternatives fall within the respective statutory time limits. (correct answer)
3. Purchase must be completed within two months of transfer.
4. Construction must be completed within two years after transfer.

Answer: B — Both alternatives fall within the respective statutory time limits.

Explanation. Section 54 allows purchase within one year before or two years after transfer, or construction within three years after transfer. Purchase on 5 June 2027 falls within two years of 20 June 2026. Construction completed on 19 June 2029 falls within three years. Both timelines are satisfied. The assessee must select the applicable investment route and satisfy the remaining eligibility conditions before claiming exemption.

Where it goes wrong. Applying the two-year purchase period to construction instead of the separate three-year construction period.

Authority. Section 54(1) of the Income-tax Act, 1961

Question 15 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Arjun transfers a long-term residential property on 1 August 2026 and has not yet purchased another house by the time he files his return. He files his return on 12 July 2027, while the applicable return due date is 31 July 2027. He deposits the unutilised capital gain in the Capital Gains Account Scheme on 20 July 2027. Can the deposit preserve the section 54 exemption?

1. Yes, because the deposit was made before 31 July 2027.
2. Yes, because the deposit is within three years after transfer.
3. No, because the deposit was made after filing the return. (correct answer)
4. No, because CGAS cannot be used for section 54 claims.

Answer: C — No, because the deposit was made after filing the return.

Explanation. Section 54(2) requires the unutilised capital gain to be deposited in CGAS before furnishing the return and, in any case, not later than the applicable section 139(1) due date. Arjun filed his return on 12 July 2027 but deposited the amount on 20 July 2027. Though the deposit precedes the due date of 31 July, it follows the filing of the return. Thus, the prescribed deposit condition is not satisfied.

Where it goes wrong. Considering only the statutory return due date while ignoring the separate requirement that the CGAS deposit precede filing of the return.

Authority. Section 54(2) of the Income-tax Act, 1961; Section 139(1) of the Income-tax Act, 1961

Question 16 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Aryan Steels Ltd. transfers a long-term industrial building on 30 September 2026 and earns LTCG of ₹72,00,000. It proposes to invest part of the gain in qualifying REC bonds redeemable after five years. Two alternative investment dates are 30 March 2027 and 31 March 2027. Which date falls within the six-month investment period under section 54EC?

1. Only 31 March 2027 qualifies because it is the financial year-end.
2. Both dates qualify because they are within the same financial year.
3. Neither date qualifies because the investment must occur in 2026.
4. 30 March qualifies; 31 March falls beyond the six-month limit. (correct answer)

Answer: D — 30 March qualifies; 31 March falls beyond the six-month limit.

Explanation. The original transfer took place on 30 September 2026. The six-month period expires on 30 March 2027. Therefore, investment made on 30 March is within the permitted period. Investment on 31 March is one day beyond the six-month limit and does not qualify. The financial year-end does not extend the six-month statutory period under section 54EC.

Where it goes wrong. Using 31 March as the investment deadline merely because it is the end of the financial year.

Authority. Section 54EC(1) of the Income-tax Act, 1961

Question 17 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Smt. Leena transfers two qualifying long-term assets, one land parcel and one building, during T.Y. 2026-27. The aggregate long-term capital gain is ₹78,00,000. She invests ₹30,00,000 in REC bonds in December 2026 and ₹25,00,000 in qualifying NHAI bonds in May 2027. Both investments are within six months of the respective transfer. Determine the maximum section 54EC deduction.

1. ₹50,00,000. (correct answer)
2. ₹55,00,000.
3. ₹78,00,000.
4. ₹30,00,000.

Answer: A — ₹50,00,000.

Explanation. Aggregate qualifying investment = ₹30,00,000 + ₹25,00,000 = ₹55,00,000. Section 54EC imposes an aggregate ceiling of ₹50,00,000 for investments relating to transfers during a tax year and the immediately following tax year. The eligible deduction is the lower of LTCG and eligible investment. Therefore, deduction = lower of ₹78,00,000 and ₹50,00,000 = ₹50,00,000. The additional ₹5,00,000 investment gives no further exemption.

Where it goes wrong. Treating investments made in two financial years as carrying separate ₹50,00,000 limits for the same original transfer.

Authority. Section 54EC(1) and Section 54EC(2) of the Income-tax Act, 1961

Question 18 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Dev purchases qualifying five-year specified bonds on 1 February 2027 after transferring long-term land and obtaining section 54EC exemption of ₹35,00,000. On 15 January 2031, he transfers the bonds to another investor. The bonds have therefore been held for less than five years. What is the treatment of the earlier exemption?

1. The exemption continues because the bonds were held for four years.
2. The earlier ₹35,00,000 exemption is chargeable as LTCG in the violation year. (correct answer)
3. Only the sale profit on bonds becomes short-term capital gain.
4. The exemption becomes taxable as income from other sources in 2031.

Answer: B — The earlier ₹35,00,000 exemption is chargeable as LTCG in the violation year.

Explanation. Section 54EC requires the specified bonds to be retained for at least five years. Acquisition date = 1 February 2027. Proposed transfer date = 15 January 2031, which is before completion of five years. The lock-in condition is violated. Consequently, the earlier section 54EC deduction of ₹35,00,000 becomes chargeable as long-term capital gain in the previous year in which the bonds are transferred.

Where it goes wrong. Treating the bond's originally prescribed five-year redemption maturity as sufficient even though the assessee actually transfers the bonds earlier.

Authority. Section 54EC(2) of the Income-tax Act, 1961

Question 19 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Kunal transfers a long-term investment in listed securities for ₹1,20,00,000 and incurs eligible transfer expenses of ₹3,00,000. His LTCG is ₹72,00,000. He purchases a residential house in India for ₹58,50,000 within the statutory period and meets all ownership conditions under section 54F. Calculate the exemption under section 54F.

1. ₹58,50,000.
2. ₹72,00,000.
3. ₹36,00,000. (correct answer)
4. ₹35,10,000.

Answer: C — ₹36,00,000.

Explanation. Net consideration = ₹1,20,00,000 − ₹3,00,000 = ₹1,17,00,000. Section 54F exemption = LTCG × new-house cost ÷ net consideration. Calculation: ₹72,00,000 × ₹58,50,000 ÷ ₹1,17,00,000 = ₹72,00,000 × 1/2 = ₹36,00,000. The remaining LTCG of ₹36,00,000 remains chargeable, subject to other applicable provisions.

Where it goes wrong. Using gross consideration rather than net consideration, or deducting the new-house investment directly from the capital gain.

Authority. Section 54F(1) of the Income-tax Act, 1961

Question 20 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Ms. Radhika transfers a long-term capital asset other than a residential house and proposes to claim section 54F exemption. On the date of transfer, she owns one residential house in India apart from the proposed new house. She satisfies the purchase-period condition and intends to invest the required net consideration in the new property. Which conclusion is appropriate?

1. She is ineligible because even one existing residential house disqualifies her.
2. She is eligible only when the new property is purchased outside India.
3. She is eligible only if she owns at least two existing houses.
4. She satisfies the ownership condition because she owns only one existing house. (correct answer)

Answer: D — She satisfies the ownership condition because she owns only one existing house.

Explanation. The ownership condition under section 54F is that on the date of transfer, the assessee must not own more than one residential house other than the new asset. Radhika owns one existing residential house. Therefore, she satisfies the threshold. Provided the new house is situated in India and all investment and subsequent ownership conditions are met, she may claim proportionate or full exemption depending on the investment in net consideration.

Where it goes wrong. Interpreting the condition as requiring complete absence of residential-house ownership.

Authority. Section 54F(1) of the Income-tax Act, 1961

Question 21 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Pranav claims exemption of ₹42,00,000 under section 54F after transferring a long-term asset other than a residential house. He purchases the qualifying new residential house within two years after transfer. However, eighteen months after the original transfer, he purchases another residential house apart from the qualifying new asset. What is the consequence under section 54F?

1. The earlier ₹42,00,000 exemption becomes taxable as LTCG in the purchase year. (correct answer)
2. The exemption remains valid because the first replacement house was purchased in time.
3. Only the cost of the second house becomes taxable as short-term capital gain.
4. The earlier exemption is restored if both houses are retained for five years.

Answer: A — The earlier ₹42,00,000 exemption becomes taxable as LTCG in the purchase year.

Explanation. Section 54F(2) provides that where the assessee purchases another residential house, other than the new asset, within two years after transfer of the original asset, the earlier exemption becomes chargeable as LTCG. Pranav purchased the additional house eighteen months after the original transfer. Thus, the restriction is violated. The previously allowed exemption of ₹42,00,000 becomes taxable as LTCG in the tax year of the additional purchase.

Where it goes wrong. Considering only the timely acquisition of the first replacement property and overlooking the subsequent acquisition restriction.

Authority. Section 54F(2) of the Income-tax Act, 1961

Question 22 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Smt. Meera transfers a long-term capital asset other than a residential house. Her net consideration is ₹1,40,00,000 and her capital gain is ₹60,00,000. Before the due date for filing her return, she has invested ₹50,00,000 in a qualifying new residential house. She wishes to preserve the possibility of claiming complete exemption under section 54F. What amount should she deposit in CGAS, assuming no other use of the consideration?

1. ₹10,00,000, being the balance of capital gain.
2. ₹90,00,000, being the remaining net consideration. (correct answer)
3. ₹60,00,000, being the total capital gain.
4. ₹50,00,000, being the investment already utilised.

Answer: B — ₹90,00,000, being the remaining net consideration.

Explanation. Under section 54F, complete exemption requires investment of the net consideration, rather than merely the capital gain. Net consideration = ₹1,40,00,000. Already utilised = ₹50,00,000. Balance requiring deposit to preserve the full-investment claim = ₹1,40,00,000 − ₹50,00,000 = ₹90,00,000. The deposit must be made before filing the return and not later than the applicable section 139(1) due date.

Where it goes wrong. Depositing only the uninvested portion of capital gain instead of the uninvested balance of net consideration.

Authority. Section 54F(1) and Section 54F(4) of the Income-tax Act, 1961

Question 23 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Ritesh transfers a long-term capital asset other than a residential house for net consideration of ₹15 crore and earns LTCG of ₹7.50 crore. He purchases a qualifying residential house in India for ₹12 crore within the prescribed period and satisfies all ownership conditions. Determine the maximum exemption under section 54F after applying the statutory ceiling on the cost of the new house.

1. ₹7.50 crore.
2. ₹6 crore. (correct answer)
3. ₹5 crore.
4. ₹12 crore.

Answer: B — ₹6 crore.

Explanation. The cost of the new house is restricted to ₹10 crore for section 54F. Net consideration = ₹15 crore; LTCG = ₹7.50 crore. Deduction = LTCG × eligible house cost ÷ net consideration. Therefore, exemption = ₹7.50 crore × ₹10 crore ÷ ₹15 crore = ₹5 crore. The actual expenditure of ₹12 crore cannot be fully considered because the qualifying investment is capped at ₹10 crore.

Where it goes wrong. Using the actual ₹12 crore purchase cost without applying the statutory ₹10 crore ceiling.

Authority. Section 54F(1) of the Income-tax Act, 1961; Section 54F(1), relevant proviso, of the Income-tax Act, 1961

Question 24 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Sandeep transfers a long-term residential house and earns LTCG of ₹2.10 crore. He has never exercised the two-house option under section 54. He purchases two residential houses in India within the prescribed purchase period, each costing ₹1 crore. Can he claim exemption in respect of both houses?

1. Yes, because he has never exercised the option in an earlier year.
2. Yes, because the combined cost does not exceed the capital gain.
3. Yes, because purchase of two houses is permitted for every individual.
4. No, because his capital gain exceeds the ₹2 crore threshold. (correct answer)

Answer: D — No, because his capital gain exceeds the ₹2 crore threshold.

Explanation. The two-house option under section 54 is available only where LTCG does not exceed ₹2 crore. Sandeep's gain is ₹2.10 crore, exceeding the threshold by ₹10,00,000. Therefore, he cannot claim the special two-house option, even though he has not used it previously. He may claim ordinary section 54 exemption for one qualifying residential house, subject to the other requirements and the ₹10 crore investment ceiling.

Where it goes wrong. Treating the one-time lifetime availability of the option as sufficient without separately testing the ₹2 crore capital gain ceiling.

Authority. Section 54(1) of the Income-tax Act, 1961

Question 25 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Karan transfers a residential house and earns LTCG of ₹75,00,000. He purchases a qualifying replacement house on 1 June 2027 for ₹90,00,000 and claims exemption of ₹75,00,000 under section 54. He sells the replacement house on 1 May 2029 for ₹1,10,00,000, before completing three years from its purchase. Determine the capital gain on the replacement house after applying the special cost adjustment.

1. ₹95,00,000, being sale consideration less the adjusted acquisition cost. (correct answer)
2. ₹35,00,000, being sale consideration less the original cost.
3. ₹75,00,000, being the exemption claimed earlier.
4. ₹20,00,000, being appreciation over original purchase cost.

Answer: A — ₹95,00,000, being sale consideration less the adjusted acquisition cost.

Explanation. Where the new residential house is transferred within three years, the cost of acquisition is reduced by the earlier section 54 exemption. Original cost = ₹90,00,000. Earlier exemption = ₹75,00,000. Adjusted cost = ₹90,00,000 − ₹75,00,000 = ₹15,00,000. Sale consideration = ₹1,10,00,000. Capital gain = ₹1,10,00,000 − ₹15,00,000 = ₹95,00,000. The early transfer therefore substantially increases the gain on the replacement property.

Where it goes wrong. Using the original purchase cost without reducing it by the exemption previously allowed under section 54.

Authority. Section 54(1) of the Income-tax Act, 1961; Section 54(1), relevant proviso, of the Income-tax Act, 1961