Paid for the House but Put It in Your Sister’s Name? You Can Still Claim Capital Gains Exemption Under Section 54F — ITAT Hyderabad Ruling Explained

Selling a property and reinvesting in a new house to save capital gains tax is one of the most commonly used tax planning strategies in India. Section 54F of the Income Tax Act gives a taxpayer a full exemption from long-term capital gains tax if the sale proceeds are invested in a new residential house within a specified time.

But what happens when practical life gets in the way? What if you are living abroad, the paperwork needs to be done urgently, and the only practical way to register the property is in the name of a trusted family member — like your sister — with the full understanding that she will transfer it back to you once you return?

The Income Tax Department’s answer has often been: no exemption. But the Income Tax Appellate Tribunal (ITAT), Hyderabad Bench has now said otherwise. In the case of DCIT v. Revanth Challagalla, reported on 24 March 2026, the Tribunal upheld the Section 54F deduction even though the new property was initially registered in the sister’s name — because the entire purchase consideration was paid by the assessee himself, and the sister subsequently executed a gift deed transferring the property back to him.

Facts and Issues of the Case

Revanth Challagalla is an NRI (Non-Resident Indian) who was residing and working abroad during the relevant period. In Assessment Year 2022-23 (i.e., Financial Year 2021-22), he sold certain villas — residential properties — held as long-term capital assets. The sale resulted in significant long-term capital gains.

To claim exemption from these capital gains under Section 54F of the Income Tax Act, Challagalla invested the entire sale proceeds in a new residential flat in Hyderabad. Every rupee of the purchase consideration for the new flat was paid from his own funds. There was no dispute on this point.

However, because he was based abroad at the time and could not be physically present in India to complete the registration formalities, the new flat was registered in the name of his sister. This was a practical arrangement — the sister had no financial stake in the property and did not contribute even a single rupee towards its purchase. It was supported by a clear understanding between the siblings that the property would be transferred to Revanth once the paperwork could be completed.

True to this arrangement, the sister subsequently executed a registered gift deed transferring the flat back to Revanth Challagalla. The property was now legally in his name. He then claimed the Section 54F exemption in his income tax return.

The Assessing Officer (AO) rejected the Section 54F claim during scrutiny assessment. The AO’s reasoning was straightforward: the property was registered in the sister’s name, not in the assessee’s name. Since Section 54F requires the taxpayer to purchase a residential house, and the new house was legally owned by the sister at the time of purchase, the deduction could not be allowed. The CIT(A) disagreed with the AO and allowed the deduction. The department then appealed to the ITAT, Hyderabad Bench.

The Core Legal Question Before the Tribunal: Can Section 54F exemption be claimed by a taxpayer who funded the entire purchase of a new residential property, but had it initially registered in his sister’s name — with the sister subsequently gifting the property back to him?

Observations by the Tribunal

The ITAT, Hyderabad Bench carefully examined the facts and the legal arguments advanced by both sides, and made the following key observations:

First, the Tribunal focused on the most critical undisputed fact: the entire purchase consideration for the new flat was paid by Revanth Challagalla from his own funds. The sister paid nothing. She was simply a name on the registration document — a trustee in substance, even if not formally designated as one. The economic reality was that the assessee was the true and beneficial owner of the property from the very moment of purchase.

Second, the Tribunal drew upon the well-established legal distinction between legal ownership and beneficial ownership. In Indian law, the person whose name appears on a registered sale deed is the legal owner. But the person who has paid the full consideration and controls the property is the beneficial owner. Where the two are different, courts and tribunals look through the form to the substance. Here, there was no doubt that Revanth was the beneficial owner throughout.

Third, the Tribunal took note of the practical circumstances that led to the unusual registration arrangement. The assessee was an NRI, physically unable to be present in India during the registration process. The family arrangement with his sister was not a device to evade tax — it was a genuine practical solution to a logistical problem, supported by the subsequent gift deed which confirmed that the sister had always held the property on behalf of her brother.

Fourth, the Tribunal relied on a line of judicial precedent which has consistently taken a liberal and purposive view of Section 54F. Courts have held that the object of Section 54F is to encourage taxpayers to reinvest capital gains in residential housing — thereby addressing the housing shortage and rewarding genuine reinvestment. A narrow, hyper-technical interpretation that denies the exemption solely because of a name on a registration document — when the taxpayer has genuinely reinvested the money — would defeat this very purpose.

Fifth, the Tribunal noted that the subsequent gift deed was a registered instrument executed in accordance with law. Once the gift was complete, the assessee became the absolute legal owner. The gift did not create the ownership — it merely formalized what was already the economic reality. The Tribunal found no reason to treat the arrangement as a sham or a colorable device, particularly since there was no tax advantage obtained by routing the purchase through the sister’s name.

The Law Applicable

Section 54F of the Income Tax Act, 1961 provides a capital gains exemption to individuals and Hindu Undivided Families (HUFs) when long-term capital gains arising from the sale of any long-term capital asset — other than a residential house — are reinvested in the purchase or construction of a new residential house in India.

In plain terms: if you sell shares, jewellery, commercial property, land, or any other long-term asset and invest the proceeds in a new residential house, you pay no capital gains tax on that amount. This is one of the most generous exemptions in the Indian income tax law.

The key conditions under Section 54F that must be satisfied are:

Condition Under Section 54F	Status in This Case
Asset sold must be a long-term capital asset (other than a house)	YES — Villas (residential plots/buildings) sold were long-term assets
Investment in ONE new residential house in India	YES — Flat purchased in Hyderabad
Purchase within 1 year before or 2 years after sale (or construction within 3 years)	YES — Investment made within the stipulated period
Taxpayer should not own more than one house on date of transfer	YES — Assessee did not own another house
New house should not be sold within 3 years of purchase	Complied — no premature sale

The section uses the phrase ‘purchased… a residential house.’ A strict literal reading of these words would suggest the house must be in the taxpayer’s own name. However, Indian courts and tribunals have consistently refused to apply such a rigid interpretation. The Gujarat High Court in CIT v. Kamal Wahal held that the purpose of Section 54F is to encourage reinvestment in housing, and denying the exemption on purely technical grounds of whose name is on the deed — when the taxpayer has genuinely invested — would be contrary to legislative intent.

The Tribunal in this case also considered the principle that a person who pays the full consideration for a property is its beneficial owner — regardless of in whose name the property is registered. This principle flows from Section 53A of the Transfer of Property Act, 1882, and has been recognised in numerous income tax rulings. A beneficial owner has all the rights of ownership in substance, even if not in form.

The gift deed executed by the sister was a registered transfer under the Transfer of Property Act, 1882. A gift of immovable property is valid only when made by a registered instrument signed by the donor in the presence of two witnesses. All requirements were met here. Once the gift was completed, the assessee became the absolute legal owner — and the Section 54F investment was confirmed in its entirety.

Conclusion by the Tribunal — and What It Means for You

The ITAT, Hyderabad Bench dismissed the department’s appeal and upheld the CIT(A)’s order allowing the Section 54F deduction. The Tribunal concluded:

• The entire purchase consideration for the new flat was paid by the assessee — the sister paid nothing. The assessee was the beneficial owner of the property from day one.
• The registration of the property in the sister’s name was a genuine practical arrangement necessitated by the assessee’s NRI status and physical absence from India — not a tax avoidance scheme.
• The subsequent gift deed, duly registered, transferred full legal ownership to the assessee, confirming and formalising the beneficial ownership that already existed.
• Section 54F must be interpreted purposively — its objective is to encourage reinvestment of capital gains in residential housing. The assessee had genuinely done exactly that. Denying the exemption on a technical ground would defeat the legislative purpose.
• The Section 54F deduction was upheld in full. The department’s appeal was dismissed.

This judgment has significant practical implications for a very large group of taxpayers — particularly NRIs, joint family members, and anyone who has ever purchased property in a relative’s name for practical or family reasons.

What This Judgment Means for You — Key Takeaways: If you paid for the property from your own funds, you are the beneficial owner — even if the registration is in a relative’s name. Section 54F can still apply to you.A registered gift deed can cure the registration defect — provided it is genuine, not a paper arrangement created only to claim tax benefits.Document everything carefully — bank statements showing payment from your account, correspondence with the relative, and the gift deed must all be in order before you file your claim.If the AO has denied your Section 54F claim on similar grounds, this ruling is directly relevant — you have strong grounds to challenge the denial at CIT(A) or ITAT.This protection applies only when the arrangement is genuine. Where courts detect a colourable device — for example, where the property is gifted to a relative solely to bypass the ‘one house’ restriction in Section 54F — the exemption has been denied.

The law on Section 54F has always been intended to help honest taxpayers who reinvest their capital gains in housing. The ITAT Hyderabad’s ruling in DCIT v. Revanth Challagalla reinforces this intent — substance over form, economic reality over technical registration, and genuine reinvestment over paperwork perfection.

If you have sold a long-term capital asset and are planning to reinvest in a house — or have already done so — make sure your documentation is airtight and your claim is correctly structured. The difference between a successful Section 54F claim and a wrongful tax demand often comes down to the quality of advice you receive at the outset.