Query on Deemed Capital Gain under Section 54(2)

An assessee sold a residential property in AY 2024–25 for ₹1.10 crore. The purchase cost was ₹30 lakh, which after indexation became ₹60 lakh, resulting in a long-term capital gain (LTCG) of ₹50 lakh.

The assessee deposited the entire LTCG amount of ₹50 lakh in the Capital Gains Account Scheme (CGAS) and claimed exemption under Section 54 in the ITR.

However, within 2 years, instead of purchasing a residential house property, the assessee purchased a commercial property, thereby violating the conditions of Section 54.

As per Section 54(2), the exemption should be withdrawn and the unutilized amount should be treated as deemed capital gain.

Issues for clarification:

  1. Year of Taxability:
    Section 54(2) states that unutilized CGAS amount becomes taxable after the expiry of 3 years.
    However, in this case, the violation (purchase of commercial property instead of residential property) has already occurred within 2 years.
    Should the deemed capital gain be taxed:
    • In AY 2026–27 (year of violation), OR
    • Only after completion of 3 years as per Section 54(2)?

  2. Amount of Taxable LTCG:
    At the time of original computation, LTCG was ₹50 lakh after indexation.
    Now, upon withdrawal of exemption:

    • Should the taxable LTCG be ₹50 lakh (indexed gain already computed), OR
    • ₹80 lakh (₹1.10 crore – ₹30 lakh, without indexation benefit)?

    Additionally, since current tax provisions apply LTCG tax @ 12.5% without indexation, how should this situation be handled in ITR reporting?

Request guidance on correct interpretation and reporting treatment.