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How to Claim Tax Exemption Under Section 54F(Now Section 86)?

Understand Section 54F of the Income Tax Act, eligibility, conditions, and how to claim tax exemption on long-term capital gains

Written by : Knowledge Centre Team

2026-07-30

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7 minutes read

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You diligently paid your life insurance premiums for years, perhaps decades. Now, the policy has matured, and a significant sum is on its way, bringing relief and helping you plan for your future financial goals bringing a sense of relief and helping you plan your future financial goals. 

However, it is important to note that. due to higher premiums or specific policy types, a portion of your maturity amount is actually taxable?

Before assuming that the entire maturity amount will remain tax-exempt, let’s understand an often-overlooked strategy: Section 86 of the Income Tax Act 2025 (previously known as Section 54F of the Income Tax Act 1961). If you have eligible long-term capital gains from the transfer of a long-term capital asset (other than a residential house) and satisfy the prescribed conditions, this provision may help you claim a tax exemption by investing in a residential house. Understanding the eligibility and conditions of Section 54F tax exemption can help you make informed financial decisions. Let's understand how it works.

Key Takeaways

  • Section 86 of the Income Tax Act 2025 (previously known as Section 54F of the Income Tax Act 1961) provides a tax exemption on eligible long-term capital gains

  • Claim Section 86 of the Income Tax Act 2025  exemption by investing in an eligible residential house and meeting the prescribed conditions

  • The exemption is subject to prescribed investment timelines and ownership conditions

  • Unutilised capital gains may be deposited in the Capital Gains Account Scheme (CGAS) before the applicable due date

  • Consulting a tax professional can help ensure eligibility and compliance

When Does Life Insurance Maturity Attract Tax?

Let's first clarify a few points. The general rule under Schedule II of the Income Tax Act 2025 (previously known as Section 10(10D) of the Income Tax Act 1961) is that the amount received from a life insurance policy, including maturity benefits, is tax-exempt, subject to the prescribed conditions.  However, as with many tax laws, there are crucial exceptions you should be aware of.

If your policy falls under these categories, the maturity proceeds may not qualify for exemption under Schedule II of the Income Tax Act 2025, and the taxable amount will be determined as per the applicable provisions of the Income Tax Act.

The categories are as follows:

  • High Premium Policies (Issued after April 1, 2012): If the annual premium paid exceeds 10% of the actual capital sum assured

  • High Premium Policies (Issued after April 1, 2003, but before March 31, 2012): If the annual premium paid exceeds 20% of the actual sum assured

  • High Premium ULIPs (Issued on or after Feb 1, 2021): The policy is affected if the total annual premium for ULIPs goes over ₹2.5 lakh in any year during the policy term (specific rules apply)

  • Life insurance policies (other than ULIPs) issued on or after 1 April 2023: The aggregate annual premium exceeds ₹5 lakh, subject to the conditions specified under the Income Tax Act

  • Policies without adequate life cover

Where the exemption under Schedule II of the Income Tax Act 2025 is not available, the tax treatment depends on the type of policy and the applicable provisions of the Income Tax Act.

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What is Section 54F Exactly?

Section 86 of the Income Tax Act 2025 allows an individual to claim a tax exemption from long-term capital gains (LTCG) arising from the transfer of a long-term capital asset other than a residential house property.  The exemption is available if the net consideration is reinvested in the purchase or construction of one eligible residential house property within the prescribed timeline. 

Its core purpose is to encourage taxpayers to reinvest long-term capital gains from assets such as shares, gold, bonds, or other eligible capital assets into a residential property to reduce their tax liability. Section 86 of the Income Tax Act 2025 helps promote investment in residential housing by providing this tax benefit, subject to the prescribed conditions.

Conditions You Must Meet for Section 54F Exemption

To claim the exemption under Section 86 of the Income Tax Act 2025 , you must satisfy certain eligibility criteria and prescribed conditions. The key requirements are as follows:

  • You must be an Individual or a Hindu Undivided Family (HUF) eligible to claim the exemption under Section 86 of the Income Tax Act 2025.

  • The long-term capital gain must arise from the transfer of a long-term capital asset other than a residential house property.

  • The net consideration from the transfer must be invested in the purchase or construction of one eligible residential house property in India.

  • You must retain ownership of the new residential property for at least three years after its purchase or the completion of construction. Selling it before this period may result in the previously claimed exemption becoming taxable in the year of transfer.

  • The investment must be in a residential house property situated in India.

What is the Investment Timeline for Claiming the Section 54F Exemption?

There is a specified timeline within which you must invest the net consideration from the transfer of the original long-term capital asset to claim Section 86 of the Income Tax Act 2025 (previously known as Section 54F) exemption:

  • If you are purchasing a residential property, the purchase must be made within 1 year before or 2 years after the date of transfer of the original asset

  • If you are constructing a residential house property, the construction must be completed within three years from the date of transfer of the original asset

Do you know

Did You Know?

From AY 2024-25, Section 86 of the Income Tax Act 2025 is capped at ₹10 crore 
 

Source: Income Tax India

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How to Claim the Section 54F for Tax Exemptions?

Claiming a Section 54F exemption requires careful planning and timely action. Following the prescribed process can help you determine your eligibility and complete the claim accurately:

Step 1: Receive & Assess: Determine the long-term capital gains arising from the transfer of the original capital asset. Calculate the eligible net consideration for claiming Section 86 of the Income Tax Act 2025 exemption. 

Step 2: Consult & Classify: Engage a qualified Chartered Accountant (CA) immediately. Discuss your eligibility under Section 86 of the Income Tax Act 2025 based on the nature of the asset transferred and your specific circumstances.  Calculate the precise LTCG amount.

Step 3: Property Identification: Finalise either the residential property you intend to purchase or the construction plan.

Step 4: Invest Smartly: Execute the purchase or commence construction, strictly adhering to the prescribed timelines under Section 86 of the Income Tax Act 2025 (formerly. 

Step 5: Utilise CGAS (if needed): When the ITR filing deadline is near and you haven't fully invested, deposit the required amount into a CGAS account before filing if the net consideration remains unutilised, subject to the applicable provisions.

Step 6: Document Everything: Keep meticulous records of the original asset transfer documents, maturity payment statements, premium payment receipts, bank statements showing receipt and investment, purchase/construction agreements and receipts, and CGAS deposit/withdrawal slips.

Step 7: Claim in ITR: File your income tax return correctly, claiming the Section 54F exemption under the capital gains schedule, and support it with your documentation. You can use the online income tax calculator for precise data.

Common Mistakes & Pitfalls You Should Avoid

Rolling life insurance maturity gains into property under Section 54F requires diligence. Don't fall into the following traps:

  • Failing to get professional validation that your long-term capital gains and the transfer of the original asset qualify for the Section 86 of the Income Tax Act 2025 exemption. 

  • Incorrectly computing the long-term capital gains, net consideration,  or the amount needed for reinvestment.

  • Even a day's delay in purchase, construction, or CGAS deposit can invalidate your claim, as timelines are absolute.

  • Investing less than required leads to only a partial exemption. Hence, you should know the exact amount needed for full relief.

  • Poor records make it impossible to substantiate your claim if questioned.

  • Offloading the new property within the prescribed lock-in period reverses the tax benefit.

  • Incorrectly depositing, withdrawing, or failing to utilise CGAS funds within the timeframe.

Conclusion

Section 86 of the Income Tax Act 2025 can help eligible taxpayers reduce their tax liability by claiming an exemption on long-term capital gains when the prescribed conditions are fulfilled. Understanding the eligibility criteria, investment timelines, and documentation requirements is essential for successfully claiming the exemption.

Since the provisions of Section 86 of the Income Tax Act 2025 involve specific conditions and timelines, it is advisable to assess your eligibility carefully and seek professional guidance before making any investment decisions. Proper planning can help you maximise the available tax benefits while staying compliant with the Income Tax Act.

Glossary

  1. Schedule II (formerly known as Section 10(10D)): Exempts eligible life insurance maturity benefits from tax 
  2. LTCG: Profit earned from selling a long-term capital asset after holding it for the required period 
  3. Net Consideration: Total amount received from transferring the original asset after deducting transfer expenses 
  4. Section 86 (formerly known as Section 54F): Exempts eligible long-term capital gains, subject to prescribed conditions   
  5. CGAS: A scheme allowing taxpayers to deposit unutilised capital gains into bank accounts before the tax filing deadline
Glossary book
Uncertain About Insurance

FAQs

If the life insurance maturity gains are reinvested in purchasing or constructing a residential property within 1 year before or 2 years after you receive the funds, then the maturity amount can be claimed for tax exemptions.

The purchase of the new residential property must be made 1 year before or 2 years after the date you receive the maturity gains to claim tax exemptions under Section 86 of the Income Tax Act 2025.

Net consideration is the amount you get after subtracting expenses from the total amount you receive after your life insurance matures.

You can get the deductions under Section 86 of the Income Tax Act 2025 by multiplying the ratio of the reinvested amount by the net consideration for long-term capital gains.

There is no bar on the number of times you can claim tax deductions under Section 86 of the Income Tax Act 2025.

Section 86 of the Income Tax Act 2025 provides tax exemption on eligible long-term capital gains when the prescribed conditions are met

Individuals and Hindu Undivided Families (HUFs) that meet the prescribed conditions can claim the exemption under Section 86 of the Income Tax Act 2025.

No, Section 86 of the Income Tax Act 2025 exemption is generally available only for investment in one eligible residential house property.

Yes, Section 86 of the Income Tax Act 2025 may apply to long-term capital gains arising from the sale of eligible assets such as shares or mutual funds.

If the new property is sold within the prescribed lock-in period, the claimed exemption may become taxable.

Yes, NRIs can claim the Section 86 exemption under the Income Tax Act 2025 if they meet the conditions specified in the Act.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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