Capital Gains Exemption

Updated on: Aug 22nd, 2024

12 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.

Budget 2024 Latest Updates

Budget 2024 has passed the following amendments effective from FY 2024-25 -

For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed.
The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months.
Unlisted bonds and debentures are brought in line with the taxation on debt mutual funds and market-linked debentures. They will attract tax on capital gains at applicable slab rates. (i.e., they will be treated as short-term irrespective of the period of holding.)
The taxation of Short-Term Capital Gain for listed equity shares, a unit of an equity-oriented fund, and a unit of a business trust has been increased to 20% from 15%. Other financial and non-financial assets which are held for short term shall continue to attract the tax at slab rates.
For the benefit of the lower and middle-income classes, the limit on the exemption of Long-Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust has increased from Rs.1 Lakh to Rs.1.25 lakh per year. However, the rate at which it is taxed has increased from 10% to 12.5%. The exemption limit to Rs.1.25 lakhs has been increased for the whole of the year, whereas the tax rate changed on 23rd July 2024.
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.

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	Asset sold	Applicability
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	Purchase - Within 1 year before or 2 years after transfer Construction - Within 3 years from 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	1. 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 2. If the amount in CGAS is not utilised within the prescribed time limit, such unutilized amount will be taxable as capital gains
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 / STCG
		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	1. 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 2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains
54D	Compulsory acquisition of land and buildings used in an industrial undertaking	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	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	1. 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 2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains
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	1. 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 2. If a loan is taken on the security of the new specified asset within 5 years, the same will be treated as capital gains 3. Investment in specified bonds should not exceed Rs.50 lakh during the current and succeeding fiscal year
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 transfer
		Exemption Amount	Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain)
		CGAS* available	No
		Additional Conditions	1. 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 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 lakh during the current and succeeding fiscal year
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	Purchase - Within 1 year before or 2 years after transfer Construction - Within 3 years from transfer
		Exemption Amount	Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain) (Maximum exemption is limited to Rs. 10 Crores)
		CGAS* available	Yes - deposit by return filing due date
		Additional Conditions	1. 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 2. If the amount in CGAS is not utilised within the prescribed time limit, such unutilised 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, the amount of exemption allowed earlier will be chargeable as capital gains
54G, & 54GA	54G: Shifting of industrial undertaking from an urban area to a rural area.	Assessee	Any assessee
	54GA: Shifting of industrial undertaking from an urban area to SEZ	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 rural or SEZ area 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 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	1. 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 2. 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

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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.