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Capital Gains Exemption

Updated on:  

08 min read

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available. Thus, one needs to plan benefits, considering all the relief available under law.

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

The idea behind allowing deductions is that the amount 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.
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.

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:

Edit
SectionAsset soldApplicability
54Profit on sale of property used for residenceAssesseeIndividual / HUF
Type of asset transferredResidential House Property
Type of transferLTCG
New asset purchasedOne Residential House From AY 2021-22 If CG is lessthen or equal to 2 croresTwo residential houses can purchased and this option is available only once for an assessee.
Time Limit for investment in new assetPurchase - Within 1 year before or 2 years after transfer Construction - Within 3 years from transfer
Exemption AmountLong-Term Capital GainORCost of new asset whichever lesser
CGAS* availableYes - deposit by return filing due date
Additional Conditions1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains
54BCapital gain on transfer of land used for agricultural purposesAssesseeIndividual / HUF
Type of asset transferredLand used for agricultural purposes by the individual / his parent / HUF as the case may be for 2 years prior to transfer
Type of transferLTCG
New asset purchasedAgricultural land
Time Limit for investment in new assetWithin 2 years from the date of transfer
Exemption AmountLong-Term Capital GainORCost of new asset (land)whichever lesser
CGAS* availableYes - deposit by return filing due date
Additional Conditions1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains
54DCompulsory acquisition of land and building used in an industrial undertakingAssesseeAny assessee
Type of asset transferredLand or building forming part of an industrial undertaking used for the same in the past 2 years prior to transfer
Type of transferLTCG
New asset purchasedLand or building for shifting or re-establishing the industrial undertaking
Time Limit for investment in new assetWithin 3 years from the date of transfer
Exemption AmountLong Term Capital GainORCost of new asset (land/building)whichever lesser
CGAS* availableYes - deposit by return filing due date
Additional Conditions1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains
54E, 54EA, 54EB,Investment in specified securitiesAssesseeAny assessee
Type of asset transferredLong-term capital asset
Type of transferLTCG
New asset purchasedSpecified securities - includes government securities, savings certificates, units of UTI, specified debentures, etc.
Time Limit for investment in new assetWithin 6 months from the date of transfer
Exemption AmountCost of new asset x Capital Gain / Net consideration (maximum up to the capital gain)
CGAS* availableNo
Additional Conditions1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
2. If a loan is taken on the security of the new specified asset within 3 years, the same will be treated as capital gains
54ECInvestment in certain bondsAssesseeAny assessee
Type of asset transferredLand or building or both
Type of transferLTCG
New asset purchasedNHAI bonds or REC bonds, redeemable after 5 years
Time Limit for investment in new assetWithin 6 months from the date of transfer
Exemption AmountCost of new asset x Capital Gain / Net consideration (maximum up to capital gain)
CGAS* availableNo
Additional Conditions1. If new asset is sold within 5 years (3 years before F.Y. 2018-19), amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
2. If a loan is taken on the security of the new specified asset within 3/5 years, the same will be treated as capital gains
3. Investment in specified bonds should not exceed Rs. 50 lakhs during the current and succeeding fiscal year
54EEInvestment in units of a specified fundAssesseeAny assessee
Type of asset transferredLong-term capital asset
Type of transferLTCG
New asset purchasedUnits notified by Central Government
Time Limit for investment in new assetWithin 6 months from transfer
Exemption AmountCost of new asset x Capital Gain / Net consideration (maximum up to capital gain)
CGAS* availableNo
Additional Conditions1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
2. If a loan is taken on the security of the new specified asset within 3 years, the same will be treated as capital gains
3. Investment in specified units should not exceed Rs. 50 lakhs during the current and succeeding fiscal year
54FInvestment in residential houseAssesseeIndividual / HUF
Type of asset transferredAny long-term capital asset other than residential house
Type of transferLTCG
New asset purchasedResidential house property
Time Limit for investment in new assetPurchase - Within 1 year before or 2 years after transfer Construction - Within 3 years from transfer
Exemption AmountCost of new asset x Capital Gain / Net consideration (maximum up to capital gain)
CGAS* availableYes - deposit by return filing due date
Additional Conditions1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains
3. 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, amount of exemption allowed earlier will be chargeable as capital gains
54G, 54GA54G: Shifting of industrial undertaking from urban area to rural area.AssesseeAny assessee
54GA: Shifting of industrial undertaking from urban area to SEZType of asset transferredCapital asset being plant, machinery, land, building or rights in land or building that is used in an industrial undertaking situated in an urban area
Type of transferSTCG / LTCG
New asset purchasedShifting of industrial undertaking involving:
1. Purchase of new plant/machinery
2. Acquisition of land or construction of a building
3. Shifted old asset and transferred undertaking to a new area
4. Incurred specified expenses
Time Limit for investment in new asset1 year before and 3 years after the date of transfer
Exemption AmountLong-Term Capital GainORCost of new asset whichever lesser
CGAS* availableYes - deposit by return filing due date
Additional Conditions1. If new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains
54GBTransfer of residential property by the eligible assessee (Applicable only if transfer made before 31.03.2017. In case investment is made in an eligible startup, transfer to be made before 31.03.2019)AssesseeIndividual / HUF
Type of asset transferredResidential property (house or a plot of land)
Type of transferLTCG
New asset purchasedEquity shares in an eligible company:
1.  Newly incorporated
2.  Engaged in the business of manufacture or eligible business
3.  Assessee has >50% share / voting rights
4. Small or Medium enterprise under MSMEA, 2006 or is an eligible startup
Time Limit for investment in new assetBy return filing due date
Exemption AmountLong-Term Capital GainORCost of new asset whichever lesser
CGAS* availableAvailable to the eligible company - by return filing due date
Additional Conditions1. If new asset is sold within 5 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon.
2. Eligible company to utilize subscription money for the purchase of new plant and machinery subject to certain conditions within 1 year. If not, such unutilized amount shall be chargeable to tax as capital gains.
3. If the amount in CGAS is not utilized by the eligible within the prescribed time limit, such unutilized 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

Frequently Asked Questions

I have sold my residential house property in May 2019 and realised long term capital gains, what are the reinvestment options to get exemptions form capital gain tax ?

You, can reinvest in the purchase of new residential house property and claim exemption under section 54 at the time of filing a return provided all other conditions are satisfied.

In the April 2020 I sold a long term capital asset being 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 assessee, if you have taken this option once in a AY you will not be eligible for any of the AY’s

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