Real Estate Mumbai

Mumbai ITAT Allows Tax Deduction on Second Flat Purchase

By GeoSquare News Desk · Published 2026-11-15

In a significant ruling for property investors, the Mumbai Income Tax Appellate Tribunal (ITAT) has allowed a taxpayer to claim tax deduction on the purchase of a second residential flat using capital gains from the sale of commercial units. The decision provides clarity on the interpretation of Section 54 of the Income Tax Act, which governs exemptions on capital gains from property sales.

The Case

A taxpayer sold six commercial units and earned nearly Rs 5 crore in long-term capital gains. He invested the proceeds to buy two residential flats on different floors of the same building. While the Income Tax Department allowed exemption for one flat, it denied the deduction for the second, arguing that the exemption is limited to one residential house.

ITAT's Ruling

The Mumbai ITAT, however, ruled in favour of the taxpayer, stating that the law does not restrict the exemption to a single property as long as the capital gains are reinvested in residential house property. The tribunal emphasised that the intention of the provision is to encourage investment in residential real estate, and multiple flats can be considered as a single residential unit if they are used for residential purposes.

Implications for Investors

This ruling brings relief to investors who sell commercial or non-residential assets and reinvest in multiple residential properties. It also clarifies that the exemption under Section 54 is not limited to one flat, provided the taxpayer genuinely uses the properties for residential purposes. However, experts advise consulting a tax professional to ensure compliance with all conditions.