Can a Wife Claim Section 54 Tax Exemption by Selling Flats Gifted by Her Husband?
A recent Mumbai ITAT ruling has confirmed that a wife can claim full Section 54 capital gains exemption when selling flats gifted by her husband and reinvesting in a new property.
Section 54Tax ExemptionProperty TransferIntrafamily TransactionsCapital GainsReal Estate MumbaiAug 02, 2025
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 ruling shows that genuine intra-family property transfers, if well-documented and legally executed, can qualify for Section 54 exemption. According to Kunal Savani, Partner at Cyril Amarchand Mangaldas, “The Mumbai ITAT’s ruling (June 2025) has re-affirmed that the exemption under Section 54 of the Income-tax Act, 1961 can be claimed even in scenarios where reinvestment is made in property purchased from a relative, including a spouse. However, such a transaction has to be genuine, documented, and well supported by financial evidence. It should focus on the legal validity (i.e., substance over form) and be aligned with the necessary compliance with the law to withstand any scrutiny.”
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 a specified timeline. This includes purchasing a new property within one year before, two years after the sale, or constructing a new property within three years.
Intra-family property transfer is a legal transfer and should be optimized for Section 54 exemptions by ensuring a genuine process is followed. Deepak Kumar Jain, founder and CEO of TaxManager.in, emphasizes that “First, gift and sale transactions must be genuine and well documented. Also, payment for reinvestment should be genuine and verifiable, and documentation for the payment trail should be maintained at all times.”
In the context of intra-family transfers, such as gifts or sales between spouses, these transactions can be considered legitimate if they are legally executed through a registered gift deed or sale deed. The consideration must be real and traceable, not just a book entry, and the purpose of the transaction should not be solely for tax avoidance. The genuine change in ownership must be established.
Furthermore, the General Anti Avoidance Rule (GAAR) is applicable only if a taxpayer makes such a transaction without any commercial substance, for instance, the immediate resale of the purchased property to the spouse. For this purpose, it is necessary to ensure that such arrangements are real, legal, and go beyond tax benefits.
To claim tax exemption under Section 54 after selling gifted property, you need to maintain 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 have reinvested in a new property, keep the new property’s agreement to sale, a valuation report, and proof of payment. 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.
Frequently Asked Questions
What is Section 54 of the Income-tax Act?
Section 54 of the Income-tax Act, 1961, 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 a specified timeline.
Can a wife claim Section 54 tax exemption if she sells a property gifted by her husband?
Yes, a wife can claim Section 54 tax exemption if she sells a property gifted by her husband and reinvests the gains in another residential property, provided all conditions are met and the transaction is genuine and well-documented.
What documents are required to claim tax exemption under Section 54?
To claim tax exemption under Section 54, you need to maintain key documents such as the registered gift deed, sale agreement, bank statements, TDS deduction details, valuation report, and proof of payment. An audit trail and certificates from professionals are also helpful.
What is the role of the General Anti Avoidance Rule (GAAR) in intra-family property transfers?
The General Anti Avoidance Rule (GAAR) is applicable if a taxpayer makes a transaction without any commercial substance, such as the immediate resale of the purchased property to the spouse. It is necessary to ensure that such arrangements are real, legal, and go beyond tax benefits.
How can I ensure that my intra-family property transfer is tax-compliant?
To ensure that your intra-family property transfer is tax-compliant, the transaction must be genuine, well-documented, and legally executed. The consideration must be real and traceable, and the purpose of the transaction should not be solely for tax avoidance. Maintain all necessary documentation and an audit trail.
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