Section 54: Can a wife claim tax exemption by selling flats gifted by her husband and reinvesting in a new property?
Intra-family property transfers between spouses are valid if backed by a registered deed and genuine consideration, not just book entries, say tax experts
In the context of intra-family transfers, such as gifts or sales between spouses, these transactions can be considered legitimate if it is legally executed through a registered gift deed or sale deed, as applicable. It is pertinent to note that the consideration for such transfer has to be real and traceable and not just a book entry. Such transactions should not be for the sole purposes of tax avoidance and therefore, the genuine change in the ownership should be established.
A landmark judgment from the Income Tax Appellate Tribunal (ITAT) Mumbai, delivered on June 9, 2025, affirmed that a taxpayer can claim full Section 54 capital gains exemption even when the new property is acquired from a spouse, provided all conditions are met. In this case, a woman sold two flats gifted by her husband for ₹6 crore in 2020 and reinvested ₹3.85 crore in another residential property. Despite the tax officer’s objections, related to clubbing provisions and alleged circular financial transactions, ITAT held that the gift deed and genuine reinvestment satisfied all legal requirements, allowing exemption.
This shows that genuine intra-family property transfers, if well-documented and legally executed, can qualify for Section 54 exemption.
Family property transfers can qualify for exemption under Section 54 of IT Act
“The Mumbai ITAT's ruling (June 2025) has re-affirmed that the exemption under Section 54 of the Income-tax Act, 1961 (“IT Act”) can be claimed even in scenarios where reinvestment is made in property purchased from a relative (i.e including a spouse). However, such a transaction has to be genuine, documented and well supported by the financial evidence. Therefore, it is necessary that it should focus on the legal validity (i.e substance over form) and also be aligned with the necessary compliance with law to withstand any scrutiny,” says Kunal Savani, Partner, Cyril Amarchand Mangaldas.
To this end, it is necessary to note that Section 54 of the IT Act provides for an exemption of capital gains arising from the transfer of a residential property, if such gains are reinvested in another residential property within specified timeline, i.e. purchase within one year before, two years after sale or construction within three years.
Intra-family property transfer is a legal transfer and should be optimized legally for Section 54 exemptions ensuring a genuine process is followed which involves three aspects. “First, gift and sale transactions must be genuine and well documented. Also, payment for reinvestment should be genuine and verifiable and documentation for payment trail should be maintained at all times,” says Deepak Kumar Jain, founder and CEO of TaxManager.in
Making intra-family transfers tax-compliant
In the context of intra-family transfers, such as gifts or sales between spouses, these transactions can be considered legitimate if it is legally executed through a registered gift deed or sale deed, as applicable; consideration is real and traceable in case of sale transactions, beyond mere book entries and the purpose of the transaction is not solely tax avoidance, with genuine ownership change established.
However, for the purpose of this provision of the IT Act, in the event there is an intra-family transfers like gifts or sale between spouses, those can be valid, given that such transfer is legally executed through a registered gift or a sale deed, as it may be the requirement. “It is pertinent to note that the consideration for such transfer has to be real and traceable and not just a book entry. Such transactions should not be for the sole purposes of tax avoidance and therefore, the genuine change in the ownership should be established,” says Savani.
Further, with respect to General Anti Avoidance Rule (GAAR), it is to be noted that it shall be applicable only if a taxpayer makes such transaction without any commercial substance, for instance, in the present case, the immediate resale of the purchased property to the spouse. For this purpose, it is necessary to ensure that such arrangements have to be real, legal and be beyond the tax benefits.
Document checklist to claim tax exemption under Section 54
“Tax authorities look at the real intention and economic effect and not just the paper work or trail. Transactions making commercial and financial sense should be well documented and trail of transactions are clean then claim of Section 54 can stand strong even in intra family transfers,” says Jain.
To claim tax exemption under Section 54 after selling gifted property, you need these key documents. First, for the gift transaction, keep the registered gift deed, gift declaration, donee’s acknowledgment, and updated property records. For the sale of the gifted property, have the sale agreement, registered sale deed, bank statements showing the money received, TDS deduction details, and capital gains calculation.
If you’ve reinvested in a new property, keep the new property’s agreement to sale, a valuation report, and proof of payment. Also maintain an audit trail showing how funds moved from the sale to the purchase. Finally, get certificates from a chartered accountant or other professionals to confirm everything is in order.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics
