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Capital Gains Exemption

By CA Mohammed S Chokhawala

Updated on: Mar 25th, 2025

8 min read

The sale of capital assets may lead to capital gain, which may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemptions/deductions are available. Thus, one needs to plan benefits, considering all the relief available under the law. In this article, we will discuss about the different capital gains exemptions that are available for the taxpayers.

Budget 2025 Update
It is proposed to include ULIPs with premiums exceeding 10% of the policy’s sum assured, alongside those with annual premiums above Rs. 2.5 lakh.
It is proposed to amend Section 2(14) to clarify that securities held by investment funds under Section 115UB, will be treated as capital assets.

The calculation of capital gains is done in the following manner:

The idea behind allowing deductions is that the number of capital gains, as calculated above, is invested in a new capital asset within a prescribed time period. The deduction is available in respect of such investment made into a new capital asset subject to certain conditions.

What are Short-Term Capital Gains?

Short term capital gain determination is dependent upon the period of holding of that assets. And Determination of Short term or long term is important because of the tax rates. You can refer to the below table which shows the nature of assets and tax rates for the same.

Particular	Upto 22nd July 2024		From 23rd July 2024
Particular	Period of Holdings	Tax Rates	Period of Holdings	Tax Rates
1. Listed Equity shares or Equity MF	Less than 1 year	15%	Less than 1 year	20%
2. Land or building, Unlisted Equity shares	Less than 2 years	Slab rates	Less than 2 years	Slab rates
3. Other capital assets	Less than 3 years	Slab rates	Less than 2 years	Slab rates
4. Specified Mutual Funds (Debt mutual funds)*	NA	Slab rates	NA	Slab rates

What are Long-Term Capital Gains?

Long term capital gain determination is dependent upon the period of holding of that assets. And the determination of short-term or long-term is important because of the tax rates. You can refer to the below table which shows the nature of assets and tax rates for the same.

Particular	Upto 22nd July 2024		From 23rd July 2024
Particular	Period of Holdings	Tax Rates	Period of Holdings	Tax Rates
1. Listed Equity shares or Equity MF	More than 1 year	10% (On exceeding Rs 100,000 gains)	More than 1 year	12.5% (On exceeding Rs 1,25,000 gains)
2. Land or building, Unlisted Equity shares	More than 2 years	20% tax rate with Indexation benefits	More than 2 years	12.5% tax rate without Indexation benefits**
3. Other capital assets	more than 3 years	20% tax rate with Indexation benefits	more than 2 years	12.5% tax rate without Indexation benefits*

*Any specified mutual funds with less than 35% exposure in Indian listed equity will fall into this category. These specified mutual funds will be taxable as short-term capital gain irrespective of the holding period.

** The tax on other assets is reduced from 20% to 12.5% with effect from 23rd July 2024. On the other hand, the indexation benefit that previously was available on the sale of long-term assets has now been eliminated. However, the Government has given taxpayers an option to compute taxes on real estate transactions purchased before 23rd July 2024 either at 12.5% without indexation or at 20% with indexation.

In this regard, we will look at the section-wise deductions available under the Act and the various conditions that need to be fulfilled to claim or be eligible for the same.

Exemptions Available for Capital Gains

Questions like who can get such deductions, what amount of deductions, what assets need to be sold, what assets need to be purchased, and in how much time are answered below:

Section 54 - Profit on sale of property used for residence

Assessee: Individual / HUF
Type of asset transferred: Residential House Property
Type of transfer: LTCG
New asset purchased: One Residential House. From AY 2021-22, If CG is less than or equal to 2 crores - Two residential houses can be purchased.
Time Limit for investment in new asset: The purchase must be made within 1 year before or 2 years after the transfer, and construction must be completed within 3 years from the transfer.
Exemption Amount: Long-Term Capital Gain OR Cost of a new asset, whichever lesser
(Maximum exemption is limited to Rs. 10 Crores)
CGAS available: Yes - deposit by return filing due date
Additional Conditions:
If a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
If the amount in CGAS is not utilised within the prescribed time limit, such unutilized amount will be taxable as capital gains.

Section 54B - Capital gain on transfer of land used for agricultural purposes

Assessee: Individual / HUF

Type of asset transferred: Land used for agricultural purposes by the individual / his parent / HUF, as the case may be for 2 years prior to transfer.

Type of transfer: LTCG

New asset purchased: Agricultural land

Time Limit for investment in new asset: Within 2 years from the date of transfer.

Exemption Amount: Long-Term Capital Gain OR Cost of the new asset (land), whichever lesser

CGAS available: Yes - deposit by return filing due date

Additional Conditions:

If a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.

Section 54D - Compulsory acquisition of land and buildings used in an industrial undertaking

Assessee: Any assessee

Type of asset transferred: Land used for agricultural purposes by the individual / his parent / HUF, as the case may be for 2 years prior to transfer.

Type of transfer: LTCG

New asset purchased: Land or building for shifting or re-establishing the industrial undertaking

Time Limit for investment in new asset: Within 3 years from the date of transfer

Exemption Amount: Long-Term Capital Gain OR Cost of the new asset (land/building) whichever lesser

CGAS available: Yes - deposit by return filing due date

Additional Conditions:

If a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.

Section 54EC - Investment in certain bonds

Assessee: Any assessee

Type of asset transferred: Land or building or both.

Type of transfer: LTCG

New asset purchased: NHAI bonds or RECL bonds, redeemable after 5 years, which are issued on or after 1.4.2018.

Time Limit for investment in new asset: Within 6 months from the date of the transfer.

Exemption Amount: Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain).

CGAS available: No

Additional Conditions:

If a new asset is sold within 5 years (3 years before F.Y. 2018-19), the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
If a loan is taken on the security of the new specified asset within 5 years, the same will be treated as capital gains
Investment in specified bonds should not exceed Rs.50 lakh during the current and succeeding fiscal year.

Section 54EE - Investment in units of a specified fund

Assessee: Any assessee

Type of asset transferred: Long-term capital asset.

Type of transfer: LTCG

New asset purchased: Units notified by the Central Government.

Time Limit for investment in new asset: Within 6 months from the date of the transfer.

Exemption Amount: Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain).

CGAS available: No

Additional Conditions:

If a new asset is sold within 5 years (3 years before F.Y. 2018-19), the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
If a loan is taken on the security of the new specified asset within 5 years, the same will be treated as capital gains
Investment in specified bonds should not exceed Rs.50 lakh during the current and succeeding fiscal year.

Section 54F - Investment in Residential House

Assessee: Individual / HUF

Type of asset transferred: Any long-term capital asset other than a residential house.

Type of transfer: LTCG

New asset purchased: Residential house property.

Time Limit for investment in new asset: The purchase must be made within 1 year before or 2 years after the transfer, and construction must be completed within 3 years from the transfer.

Exemption Amount: Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain).

CGAS available: No

Additional Conditions:

If a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon.
If the amount in CGAS is not utilised within the prescribed time limit, such unutilised amount will be taxable as capital gains.
The Individual/HUF cannot own more than 2 house properties (i.e., existing House property and new house property). If another house property is purchased, the amount of exemption allowed earlier will be chargeable as capital gains.

Section 54G & 54GA - Shifting of industrial undertaking from an urban area to a rural area and Shifting of industrial undertaking from an urban area to SEZ

Assessee: Any assessee

Type of asset transferred: Capital assets are plant, machinery, land, buildings or rights in land or buildings that are used in an industrial undertaking situated in an urban area.

Type of transfer: STCG / LTCG

New asset purchased: Shifting of industrial undertaking to an area other than an urban area to a rural or SEZ area involving:

Purchase of new plant/machinery
Acquisition of land or construction of a building
Shifted old assets and transferred undertaking to a new area
Incurred specified expenses

Time Limit for investment in new asset: 1 year before and 3 years after the date of transfer.

Exemption Amount: Long-Term Capital Gain OR Cost of new asset, whichever lesser

CGAS available: Yes - deposit by return filing due date

Additional Conditions:

If a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
If the amount in CGAS is not utilised within the prescribed time limit, such unutilised amount will be taxable as capital gains.

*CGAS stands for Capital Gains Accounts Scheme i.e., a type of account opened with a bank or specified institution that essentially acts as a means to park the capital gains until it can be used for its prescribed purpose.

Note:

HUF – Hindu Undivided Family
LTCG – Long-term capital gain
COA – Cost of Acquisition
NHAI – National Highway Authority of India

REC – Rural Electrification Corporation
STCG – Short-term capital gain
SEZ – Special Economic Zone

Capital Gains Tax India – Definition ,Types, Exemptions & Tax saving

Section 54 - Capital Gain Exemptions

LTCG Calculator

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Frequently Asked Questions

I have sold my residential house property in May 202319 and realised long-term capital gains, what are the reinvestment options to get exemptions to form capital gain tax?

You, can reinvest in the purchase of new residential house property and claim an exemption under Section 54 at the time of filing a return provided all other conditions are satisfied Or you can also claim exemption under section 54EC where you can reinvest the proceeds in NHAI or REC bonds to claim the exemption.

In April 2023, I sold a long-term capital asset house property and the gain amount is less than 2 crores, can I reinvest in two house properties?

Yes, from AY 2021-22 you can invest in two house properties if your capital gain is less than 2 crores and claim exemption under section 54 provided all other conditions are satisfied. Please note that this option is available only once for the assessee, if you have taken this option once in an AY you will not be eligible for any of the AYs.

How do I avoid capital gains tax on my property?

If you have sold any capital assets thereby incurring capital gain tax. You can plan your capital gain tax by claiming exemption as explained above under section 54 , 54EC , 54F etc. Using these section you will be able to claim exemption from capital gain tax.

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About the Author

CA Mohammed S Chokhawala

Content Writer

I'm a chartered accountant, well-versed in the ins and outs of income tax, GST, and keeping the books balanced. Numbers are my thing, I can sift through financial statements and tax codes with the best of them. But there's another side to me – a side that thrives on words, not figures. Read more

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