Taxpayers often look for ways to legally save tax after selling a residential property, especially when long-term capital gains (LTCG) are involved. One common question that arises is whether the LTCG earned from selling a house can be used to buy two separate homes—particularly in the names of children—while still claiming tax exemption. The answer lies in the fine print of the Income Tax Act, judicial interpretations, and how the investment is structured.

Understanding Section 54 of the Income Tax Act

Section 54 of the Income Tax Act provides tax relief on long-term capital gains arising from the sale of a residential house. To claim this exemption, the taxpayer must reinvest the long-term capital gains amount, not the entire sale proceeds, into another residential property within the prescribed time limit.

This distinction is crucial. Many taxpayers assume they must reinvest the full sale value of the house, but the law requires only the LTCG portion to be reinvested to claim exemption under Section 54.

Can LTCG Be Used to Buy Two Houses?

As a general rule, Section 54 allows exemption when LTCG is invested in one residential house. This means that if you sell a house and earn long-term capital gains, you can typically claim tax exemption only if you use that gain to purchase or construct a single residential property.

However, there are important exceptions and interpretations that can work in the taxpayer’s favour.

Tribunal Rulings on Adjacent Flats

Several income tax tribunals have ruled that if two adjacent flats are located in the same building and effectively function as a single residential unit, they can be treated as one house for the purpose of Section 54. In such cases, even if the taxpayer purchases more than one flat, the exemption may still be allowed, provided the flats are contiguous and intended for use as a single residence.

This interpretation has helped taxpayers who purchase two side-by-side flats to accommodate larger families or future needs.

Buying Homes in Children’s Names: Is It Allowed?

Tax experts clarify that a taxpayer can buy a new residential property in joint ownership with a son or daughter and still claim exemption under Section 54, as long as the investment is made using the taxpayer’s own LTCG funds.

Even if the children do not contribute financially to the purchase, they can be named as joint owners in the sale agreement. The key condition is that the source of funds must be the taxpayer’s capital gains, not the children’s income.

From a tax perspective, this structure does not disqualify the exemption claim. Additionally, for estate planning purposes, the taxpayer can execute a will to ensure smooth transfer of ownership to the children in the future. Property inherited through a will does not attract income tax for the recipient at the time of inheritance.

Lifetime Option to Buy Two Houses

There is also a special provision under Section 54 that allows a taxpayer to invest LTCG in two residential houses instead of one, but this benefit is available only once in a lifetime. To qualify for this option, the long-term capital gains must not exceed ₹2 crore.

If this condition is met, the taxpayer can use the LTCG to purchase two separate residential properties and still claim exemption. Once exercised, this option cannot be used again in the future.

What Taxpayers Should Keep in Mind

• Only the long-term capital gains, not the entire sale amount, need to be reinvested.




• Normally, exemption is allowed for investment in one residential house, with limited exceptions.




• Two adjacent flats may be treated as one residential unit based on judicial precedents.




• Properties can be purchased in joint names with children, provided the taxpayer funds the investment.




• The one-time option to buy two houses is available only if LTCG does not exceed ₹2 crore.

Final Word

Using LTCG from the sale of a house to buy property for children can be tax-efficient if planned correctly. While the law appears restrictive at first glance, tribunal rulings and specific provisions under Section 54 offer flexibility. Given the complexity involved and the high stakes of real estate transactions, taxpayers are advised to seek professional tax guidance before finalising such investments to ensure full compliance and maximum tax benefit.