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Exemption of Capital Gains under Sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G. 54GA and 54GB

1.   Exemption of Capital Gain on Transfer of House Property used for Residence [Section 54]

 

Capital gain arising on the transfer of a residential house is exempt u/s 54 in the following circumstances:


(i)            the asset transferred is a residential house, the income of which is chargeable under the head "income from house property";

 

(ii)           the asset transferred is a long-term capital asset and hence there is a long-term capital gain:

(iii)          the asset has been transferred by an individual or a Hindu Undivided Family;

(iv)          the assessee has purchased one residential house in India within one year before or 2 years after the date on which the transfer took place, or constructed one residential house in India within a period of 3 years after the date on which the transfer took place.

If all these four conditions are satisfied then the assessee can claim the exemption under Section 54 in respect of a Residential House which may be Let Out or Self-Occupied.

Note :

Amendment made by the Finance Act, 2019 [W.e.f. A.Y. 2020-21]

 
The exemption can be claimed for purchase/construction of two residential houses instead of one. This benefit is available only when the capital gain does not exceed 2 crore. Further, this benefit is available only once in a life time.

 

 

Quantum of Exemption :

 

1.    Amount of Long-Term Capital Gain ; or

 

2.    Amount invested in the purchase or construction of the Residential House

 

Whichever is Less .

 

2.   Exemption of Capital Gain on Transfer of Land used for Agricultural Purposes [Section 54B]

The exemption u/s 54B is available in respect of capital gains arising from transfer of agricultural land, if following conditions are satisfied:

(i)            the agricultural land had been transferred by an individual or HUF;

(ii)           the agricultural land has been used by the individual or his parents or by HUF for agricultural purposes during the 2 years immediately preceding the date of transfer;

(iii)          the assessee had purchased another agricultural land (rural or urban) within a period of 2 years after the date of transfer of the original agricultural land to be used for agricultural purpose.

Quantum of Exemption :

1.            If the amount of capital gain is equal to or less than the cost of the new agricultural land, the entire capital gain shall be exempt.

2.            If the amount of capital gain is greater than the cost of the new agricultural land, the cost of the new agricultural land shall be allowed as an exemption.

In other words, capital gain will be exempt to the extent it is invested for acquiring the new agricultural land.

 

3.   Exemption of Capital Gain on Compulsory Acquisition of Land and Buildings forming part of an Industrial Undertaking [Section 54D]

The capital gain arising from the transfer, by way of compulsory acquisition under any law, of land or buildings forming part of an industrial undertaking belonging to the assessee are exempt, if the following conditions are satisfied:

(i)            the transfer is by way of compulsory acquisition of the asset;

(ii)           the asset transferred is land or buildings forming part of an industrial undertaking belonging to the assessee;

(iii)          such land or buildings were in use by the assessee for the purpose of the business of the industrial undertaking for at least 2 years immediately preceding the date of transfer;

(iv)          capital gain on compulsory acquisition of land and buildings can be short-term or long-term.

However, since building is being used for business, it is a depreciable asset and therefore, capital gain on transfer of such building, even if, it is held for more than 3 years, will be a short-term capital gain.

Land is however, not a depreciable asset and as such the period of holding will be important for computing long-term / short-term capital gain;

(v)           the assessee purchases / constructs other land and buildings within a period of 3 years after the date of transfer for the purpose of shifting or re-establishing the said industrial undertaking or setting up another industrial undertaking.

Quantum of Exemption :

1.            If the amount of capital gain is equal to or less than the cost of the new asset, the entire capital gain shall be exempt.

2.            If the amount of capital gain is greater than the cost of the new asset, the cost of the new asset shall be allowed as an exemption.

In other words, capital gain shall be exempt to the extent it is invested in the purchase/ construction of new land / building for the industrial undertaking.

4.   Exemption of Capital Gain on Transfer of Long-term Capital Assets being Land or Building or Both not to be charged on investment in certain Bonds [Section 54EC]

Long-term capital gain arising on the transfer of any capital asset being land or building or both is exempt u/s 54EC in the following circumstances:

(i)            The asset (i.e. land or building or both) transferred is a long-term capital and hence, there is a long-term capital gain.

(ii)           The asset is transferred by any assessee.

(iii)          The assessee has within a period of 6 months after the dale of such transfer invested the capital gain in the long-term specified assets.

(iv)          The cost of long term specified assets which is considered for the purpose of exemption under this section i.e., 54EC, shall not be eligible for deduction with reference to such cost u/s 80C.

Quantum of Exemption :

(1)          If the amount of capital gain is equal to or less than the cost of the long-term specified assets acquired within 6 months of the date of transfer, the entire capital gain shall be exempt.

(ii)           If the amount of capital gain is greater than the cost of the long-term specified assets, than the cost of the long-term specified assets shall be allowed as exemption.

In other words, capital gain shall be exempt to the extent it is invested in the long-term specified assets within a period of 6 months from the date of such transfer.

Investment in Bonds limited to Rs. 50,00,000 :

The investment made in the long-term specified asset by an assessee out of capital gains arising from transfer of one or more original asset during any financial year in which the original asset or assets are transferred and in the subsequent financial year cannot exceed Rs. 50Lakh.

5. Exemption of Capital Gain on Transfer of Capital Asset and invested in Units of a Specified Fund [Section 54EE]


Long-term capital gain arising on the transfer of any capital asset is exempt under Section 54EE in the following circumstances:

 

(i)            The asset transferred is a long-term capital asset and hence, there is a long-term capital gain.


(ii)           Such asset is transferred on or after 1.4.2016.


(iii)          The asset is transferred by any assessee.

 

(iv)         The assessee has within a period of 6 months after the date of such transfer invested the capital gain in the Long-Term Specified Assets.


Provided that the investment made on or after 1.4.20 16 in the long-term specified asset by an assessee during any financial year cannot exceed Rs. 50 lakh.


Further, provided that the investment made by an assessee in the long-term specified asset, out of capital gains arising from transfer of one or more original asset, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed
Rs. 50,00,000.


Quantum of Exemption :

 

(i)            If the amount of capital gain is equal to or less than the cost of the long-term specified assets acquired within 6 months of the date of transfer, the entire capital gain shall be exempt.

 

(ii)           If the amount of capital gain is greater than the cost of the long-term specified assets, than the cost of the long-tenn specified assets shall be allowed as exemption.


In other words, capital gain shall be exempt to the extent it is invested in the Long-Term Specified Assets within a period of 6 months from the date of such transfer.

 

6.   Exemption of Capital Gain on Transfer of Asset, other than a Residential House [Section 54F]


Where an individual or HUF transfers any long-term capital asset, not being a residential house, and invests the net sale proceeds to acquire a residential house, the exemption u/s 54F is available provided following conditions are satisfied:


(i)            the asset is transferred by an individual or HUF;


(ii)           the asset transferred is a long-term capital asset;


(iii)          the asset transferred is any capital asset other than a residential house;

 

(iv)         the assessee has purchased one residential house in India within one year before or 2 years after the date on which the transfer took place or constructed one residential house in India within a period of 3 years after the date on which transfer took place;

 

(v)          the assessee does not own more than one residential house on the date of transfer of the original asset, exclusive of the one purchased for claiming exemption under this section i.e., section 54F;

 

(vi)         the assessee should not purchase, within a period of 2 years after the date of transfer of original asset or construct within a period of 3 years after the date of transfer of original asset, any other residential house other than the new asset.

 

Where part of the net sales consideration is invested, it will be Exempt Proportionately.


The proportionate exemption shall be that amount of capital gains which bears the same proportion which the amount invested in the new house bears to the net consideration price of the asset transferred i.e.,


(Long-term Capital Gain X Amount Invested ) / Net Sale Consideration


Quantum of Exemption :

 

1.            If the net sale consideration of the original asset is equal to or less than the cost of the new house, the entire capital gain shall be exempt.

 

2.            If the net sale consideration of the original asset is greater than the cost of the new house then the exemption shall be allowed in the same proportion in which the cost of the new house bears to the net sale considerations i.e. it shall be allowed proportionately as under:

 

(Long-term Capital Gain X Amount invested in the new house) / Net Sale Consideration

 

7.   Exemption of Capital gain on Transfer of Assets in cases of Shifting of Industrial Undertakings from Urban Areas [Section 54G]

The exemption is available to all categories of assessees in respect of capital gain arising on the transfer of fixed assets other than furniture and fixtures of industrial undertaking effected to shift it from an urban area.

The conditions for claiming exemptions are as under:

(i)            the transfer is effected in the course of or in consequence of shifting the undertaking from an urban area to any other area. Any other area means an area not declared as an urban area.

(ii)           asset transferred is machinery, plant, building, land or any right in building or land used for the business of industrial undertaking in an urban area;

(iii)          the capital gain arising on the asset transferred may be short-term or long-term capital gain. Normally, it will be short-term capital gain because most of the assets of the industrial undertaking will be depreciable assets;

(iv)         the capital gain is utilised within one year before or 3 years after the date of transfer for the specified purpose.

Specified purpose includes the following:

(a)          for purchase of new machinery or plant for the purpose of business of the Industrial Undertaking in the area to which the said undertaking is shifted;

(b)          acquisition of building or land or construction of building for tax payer's business in that other area;

(c)           expenses on shifting of the old undertaking and its establishment to the other area; or

(d)          incurring of expenditure on such other purposes as specified by the Central Government for this purpose.

Quantum of Exemption :

1.            If the capital gain, on transfer of the original asset, is equal to or less than the cost and expenses incurred for the above specified purposes, the entire capital gain shall be exempt.

2.            If the capital gain on transfer of the original asset is greater than the cost and expenses incurred for the specified purposes then the exemption shall be allowed to the extent of the cost and expenses incurred.

In other words, capital gain shall be exempt to the extent it is spent for the specified purpose.

8.   Exemption of Capital Gain on Transfer of Assets of Shifting of Industrial Undertaking from Urban Area to any Special Economic Zone [Section 54GA]

The exemption is available to all categories of assessees in respect of capital gain arising on the transfer of fixed assets other than furniture and fittings of industrial undertaking effected in the course of shifting of such industrial undertaking to any Special Economic Zone.

The conditions for claiming exemptions are as under:

(i)            the transfer is effected in the course of or in consequence of shifting the undertaking from an urban area to any Special Economic Zone. The Special Economic Zone may be developed in any urban area or any other area.

(ii)           asset transferred is machinery, plant, building, land or any right in building or land used for the business of industrial undertaking in an urban area:

(iii)          the capital gain arising on the asset transferred may be short-term or long-term capital gain.

Normally, it will be short-term capital gain because most of the assets of the industrial undertaking will be depreciable assets;

(iv)          the capital gain is utilised within 1 year before or 3 years after the date of transfer for the Specified Purpose.

Specified Purpose includes the following:

(a)           for purchase of new machinery or plant for the purpose of business of the Industrial Undertaking in the Special Economic Zone to which the said undertaking is shifted;

(b)          acquisition of building or land or construction of building for the purposes of the assessees business in the Special Economic Zone;

(c)           expenses on shifting of the old undertaking and its establishment to the Special Economic Zone; and

(d)          incurring of expenditure on such other purposes as specified by the Central Government for this purpose.

9.   Exemption of Long-Term Capital Gains Tax on Transfer of Residential Property if Invested in a new Manufacturing SME Company [Section 54GB]

As per section 54GB, any capital gain arising to an Individual or HUF from the transfer of a long-term capital asset being a residential property (a house or plot of land) shall be exempt proportionate to the net consideration price so invested in the subscription of equity shares of a eligible company before the due date of furnishing the return of income under section 139(1).

Essential conditions to be satisfied:

The above exemption shall be allowed if the following conditions are satisfied:

1.            There should be a long-term gain from the transfer of a residential property (i.e. a house or plot of land).

2.            Such long-term capital gain should arise to an individual or HUF,

3             The amount of net consideration should be utilized by the individual or HUF before the due date of furnishing of return of income under section 139(1), for subscription in equity shares of a eligible company (hereinafter referred to as company). If the full amount of net consideration is not utilized for subscription in equity shares, the exemption shall be allowed proportionate to the amount so invested.

4.            The amount of subscription as share capital is to be utilized by the company for the purchase of new asset (eligible plant and machinery) within a period of one rear from the date of subscription in the equity shares.

5.            The equity shares of the company or the new asset acquired by the company should not be sold or otherwise transferred by the individual/HUF or the company as the case may be with in a period of 5 years from the date of their acquisition.

6.            The exemption will be available in case of any transfer of residential property made on or before 31.3.2021 in case of an investment in eligible start up instead of eligible small or medium enterprise.

Note :

 

Amendment made by the Finance (No. 2) Act, 2019 [W.e.f. A.Y. 2020-21]

 

The Finance (No. 2) Act, 2019 has amended section 54GB so as to relax the condition in case of eligible start ups, restricting transfer of new asset being computer or computer software from the current 5 years to 3 years (for other companies it shall remain 5 years).

 

 

 

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