Capital Gains Exemption

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.

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.

*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

• Eligible Assessee: Individual/HUF
• Type of asset transferred: Residential House Property
• Type of transfer: Long-term Capital Asset
• New Asset Purchased: Residential House Property
• Time limit for new investment: 
  • Purchase 1 year before transfer or within 2 years after transfer
  • Construct within 3 years after transfer
• Exemption Amount: LTCG or Cost of New Asset (Whichever is less)
• CAGS: Yes - deposit by the return filing due date
• Additional Condition: 
  • 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.

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

• Eligible 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 before transfer.
• Type of transfer: Long-term or Short-term Capital Asset 
• New Asset Purchased: Agricultural land
• Time limit for new investment: Within 2 years from the date of transfer
• Exemption Amount: LTCG or Cost of New Asset (Whichever is less)
• CAGS: Yes - deposit by the return filing due date
• Additional Condition: 
  • 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.

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

• Eligible Assessee: Any Assessee
• Type of asset transferred: Land or building forming part of an industrial undertaking used for the same in the past 2 years prior to the transfer.
• Type of transfer: Long-term Capital Asset 
• New Asset Purchased: Land or building for shifting or re-establishing the industrial undertaking
• Time limit for new investment: Within 3 years from the date of transfer
• Exemption Amount: LTCG or Cost of New Asset (Whichever is less)
• CAGS: Yes - deposit by the return filing due date
• Additional Condition: 
  • 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.

Section 54EC - Investment in certain bonds

• Eligible Assessee: Any Assessee
• Type of asset transferred: Land or building or both
• Type of transfer: Long-term Capital Asset 
• New Asset Purchased: NHAI bonds or RECL bonds, redeemable after 5 years, which are issued on or after 1.4.2018
• Time limit for new investment: 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)
• CAGS: No
• Additional Condition: 
  • 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

• Eligible Assessee: Any Assessee
• Type of asset transferred: Long-term Capital Asset
• Type of transfer: Long-term Capital Asset 
• New Asset Purchased: Units notified by the Central Government
• Time limit for new investment: 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)
• CAGS: No
• Additional Condition: 
  • 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

• Eligible Assessee: Individual / HUF
• Type of asset transferred: Any long-term capital asset other than a residential house
• Type of transfer: Long-term Capital Asset 
• New Asset Purchased: Residential house property
• Time limit for new investment: 
  • Purchase 1 year before transfer or within 2 years after transfer
  • Construct within 3 years after transfer
• Exemption Amount: Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain)
• CAGS: Yes - deposit by the return filing due date
• Additional Condition: 
  • If a new asset is sold within 3 years, the amount previously 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 - Shifting of industrial undertaking from urban to rural areas.

• Eligible 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: Long-term or Short-term Capital Asset 
• New Asset Purchased: Shifting of an 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 the old asset and transferred the undertaking to a new area
  • Incurred specified expenses
• Time limit for new investment: 1 year before and 3 years after the date of transfer
• Exemption Amount: Long-Term Capital Gain OR Cost of new asset, whichever is lesser
• CAGS: Yes - deposit by the return filing due date
• Additional Condition: 
  • If a new asset is sold within 3 years, the amount previously 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.

Section 54GA - Shifting of industrial undertaking from an urban area to SEZ.

• Eligible 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: Long-term or Short-term Capital Asset 
• New Asset Purchased: Shifting of an 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 the old asset and transferred the undertaking to a new area
  • Incurred specified expenses
• Time limit for new investment: 1 year before and 3 years after the date of transfer
• Exemption Amount: Long-Term Capital Gain OR Cost of new asset, whichever is lesser
• CAGS: Yes - deposit by the return filing due date
• Additional Condition: 
  • If a new asset is sold within 3 years, the amount previously 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.

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

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Section 54 - Capital Gain Exemptions 

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