Section 54 & 54F: Two Flats Amalgamated = One House | ITAT 2026

What Happened?

The Mumbai Income Tax Appellate Tribunal (ITAT) recently delivered an important judgment allowing taxpayers to claim exemptions under Section 54 (capital gains on residential property) and Section 54F (capital gains on any long-term asset) when two flats have been amalgamated into a single residential unit. The tribunal held that the physical and legal amalgamation of two adjoining flats into one composite residential house does not disqualify the property from claiming these exemptions. This is a taxpayer-friendly decision that removes ambiguity around what constitutes 'one residential house' under the Income Tax Act 2025.

Background & Legal Context

What are Sections 54 and 54F?

Section 54 of the Income Tax Act 2025 allows a taxpayer to claim exemption on capital gains if the proceeds from the sale of a residential property are invested in purchasing another residential house within the specified time period (one year before or two years after the sale). The property must have been owned for at least 2 years.

Section 54F of the Income Tax Act 2025 extends similar relief but applies to capital gains from the sale of any long-term asset (not just residential property). The gain can be exempted if invested in a residential house.

Both sections have a cap on exemption:

• Section 54: Full exemption (no limit) if the sale proceeds are entirely reinvested
• Section 54F: Maximum exemption of ₹10 lakh per financial year (AY 2025-26 onwards)

The Key Question: What is 'One Residential House'?

The Income Tax Act 2025 mentions 'residential house' but does not explicitly define whether amalgamated flats count as one house or two separate properties. This created confusion:

• Some assessing officers rejected exemption claims, arguing two flats = two separate properties
• Taxpayers argued that physical amalgamation creates a single composite unit, hence one house
• The definition of 'house' under Section 2(14A) of the IT Act 2025 includes 'a building or part thereof'

The Mumbai ITAT has now clarified this ambiguity in a landmark judgment.

The ITAT's Ruling

The tribunal examined the facts and held that:

• When two residential flats are physically merged into a single composite unit (through removing partition walls, unified entrances, etc.)
• And they are legally registered or recognized as one property
• They constitute 'one residential house' for the purpose of Section 54 and 54F exemptions
• The taxpayer is entitled to claim the exemption on the sale proceeds of the amalgamated property

This ruling is significant because it aligns the legal and practical interpretation. It recognizes that modern urban properties often involve such amalgamation, and the law should accommodate this reality.

What Does This Mean for You?

If You Have Sold Amalgamated Flats

If you sold a property that consisted of two or more amalgamated flats during AY 2025-26 or AY 2026-27, you can now:

• Claim Section 54 exemption if you have purchased another residential property within one year before or two years after the sale
• Claim Section 54F exemption if you have purchased a residential property within two years after the sale, with a cap of ₹10 lakh (unless the old 1961 Act applies to your case)
• File revised returns (ITR) if your previous returns did not claim these exemptions due to fear of rejection
• Appeal pending assessments where the Assessing Officer denied these exemptions

If You Plan to Amalgamate Flats and Sell

If you own adjacent flats and plan to amalgamate and sell them:

• Ensure proper physical amalgamation (remove partition walls, create unified entrance, etc.)
• Get the property legally registered as one unit with the sub-registrar office (or at least obtain a deed of amalgamation)
• Keep documentary evidence of the amalgamation process (architect certificates, registration documents, structural plans)
• Maintain records showing the holding period of the original flats (since the exemption requires 2-year ownership)
• When you sell, claim Section 54 or 54F exemptions confidently, citing the Mumbai ITAT judgment

Holding Period Clarification

An important point: The 2-year holding period for Section 54 applies to the original flats, not the amalgamated date. If you bought Flat A in 2022 and Flat B in 2023, then amalgamated them in 2024 and sold in 2025, both flats satisfy the 2-year holding period (counted from their individual purchase dates).

Practical Impact for Homebuyers and NRIs

This ruling helps:

• NRIs selling residential properties in India (subject to applicable tax treaties)
• Homebuyers who upgrades their property through amalgamation and later sale
• Real estate investors who consolidate properties for better marketability
• Builders and developers who amalgamate flats before bulk sales

What Should You Do Now?

Action Items for Taxpayers:

• Review your past transactions: If you sold amalgamated flats in AY 2024-25 or AY 2025-26 without claiming Section 54/54F exemptions, consult your CA immediately
• File revised ITR: You can file a revised return under Section 139(5) of the IT Act 2025 (within specified timelines) to claim exemptions
• Keep evidence ready: If you are in the amalgamation process, document everything — purchase deeds, amalgamation certificates, registration documents, structural plans
• Cite the judgment: If the Assessing Officer raises a query about amalgamated flats, reference this Mumbai ITAT judgment to support your exemption claim
• Plan reinvestment carefully: Remember that Section 54 requires reinvestment in a new residential house within the specified period. Ensure your purchase timing complies with these deadlines

If You Face an Assessing Officer's Query:

• Reply with the full text of this ITAT judgment
• Provide documentary evidence of the amalgamation (structural plans, registration details)
• Show proof of reinvestment in another residential property
• If the AO still rejects the claim, file an appeal with the ITAT citing this precedent judgment

Key Takeaways

• Mumbai ITAT Judgment (Aug 2026): Two or more flats physically and legally amalgamated into one composite unit qualify as 'one residential house' for Section 54 and 54F exemptions
• Section 54 allows full exemption of capital gains if the sale proceeds are reinvested in another residential property within one year before or two years after the sale
• Section 54F allows up to ₹10 lakh exemption per financial year (AY 2025-26 onwards) when capital gains from any long-term asset are invested in residential property
• Taxpayer-friendly decision: This ruling removes the ambiguity around amalgamated properties and provides clarity for urban real estate transactions
• Action required: Maintain proper documentation of amalgamation, file revised returns if applicable, and cite this judgment if questioned by tax authorities

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