By Milisha K. Shah, B.Com, Final CA Student,
milisha82@gmail.com | May 20, 2021
Exemptions under Income from Capital Gains under the Income Tax Act, 1961.
The following exemptions available under the head of income “Income from Capital Gains” can be used for the purpose of Tax Planning, well within the scope of the Act and without any misuse of the provisions of the Income Tax Act, 1961: –
1. Sec. 54: Exemption for Residential House Property.
(a) Eligible Assessee: Individual/Hindu Undivided Family (HUF) only.
(b) Asset to be transferred: Residential House Property (should be a Long Term Capital Gain (LTCG).
(c) Asset to be acquired: One Residential House Property in India. If the LTCG is up to Rs. 2 Crore, two Residential House Properties can be acquired.
(d) Time Limit: The Residential House Property must be purchased within 1 year before or within 2 years after the date of transfer, or constructed within 3 years after the date of transfer.
(e) Capital Gain Account Scheme (CGAS)/Deposit Scheme: The Assessee (Individual/HUF) should either acquire house property or deposit desired amount in CGAS up to the due date of filing the return. The amount deposited should be utilized for the purpose of residential House Property only. If the deposited amount is misused, then the exemption claimed earlier shall be withdrawn.
(f) Amount of Exemption: Long Term Capital Gain; or Cost of new assets/Deposit Amount, whichever is lower.
(g) Lock-in-period: The new residential house property should not be transferred within 3 years from the date of its acquisition. If it is transferred, the exemption claimed earlier shall be withdrawn and it has to be reduced from the Cost of Acquisition (COA) of the new house property, i.e. the reduced cost system is followed u/s. 54 of the Income Tax Act, 1961.
2. Sec. 54B: Exemption for Urban Agricultural Land:
(a) Eligible Assessee: Individual/HUF only.
(b) Asset to be transferred: Urban Agricultural Land which was used by the Assessee or his/her parents for a period of 2 years immediately before the date of transfer took place (can be Short Term Capital Gain (STCG) or LTCG).
(c) Asset to be acquired: Urban/Rural Agricultural Land.
(d) Time Limit: The agricultural land should be purchased within 2 years after the date of transfer.
(e) Capital Gain Account Scheme (CGAS)/Deposit Scheme: The Assessee (Individual/HUF) should either acquire agricultural land or deposit desired amount in CGAS upto the due date of return filing. The amount deposited should be utilized for the purpose of an urban/rural agricultural land only. If the deposited amount is misutilized, the exemption claimed earlier shall be withdrawn.
(f) Lock-in-period: The urban/rural agricultural land should not be transferred within 3 years from the date of its acquisition. If it is transferred, the exemption claimed earlier shall be withdrawn and it has to be reduced from the Cost of Acquisition (COA) of the new house property, i.e. the reduced cost system is followed u/s. 54 of the Income Tax Act, 1961.
(g) Amount of Exemption: Lower of the following: LTCG/STCG; or Cost of new assets/Deposit Amount
3. Sec. 54D: Exemption for Industrial Land and Building:
(a) Eligible Assessee: Any person under the Income Tax Act.
(b) Asset to be transferred: Compulsory acquisition of land or building which was used by the Assessee in the business of industrial undertaking for a period of 2 years immediately prior to the date of transfer (STCG/LTCG).
(c) Asset to be acquired: New land or building for industrial undertaking.
(d) Time Limit: New industrial land or building should be acquired/constructed within 3 years from the receipt of compensation due to the compulsory acquisition.
(e) Capital Gain Account Scheme (CGAS)/Deposit Scheme: The Assessee (Individual/HUF) should either acquire new asset or deposit desired amount in CGAS upto the due date of return filing. The amount deposited should be utilized for the purpose of industrial land or building only. If the deposited amount is misutilized, the exemption claimed earlier shall be withdrawn.
(f) Amount of Exemption: Lower of the following: STCG/LTCG; or Cost of New Assets/Deposit Amount
(g) Lock-in-period: The industrial land or building should not be transferred within 3 years from the date of its acquisition. If it is transferred, the exemption claimed earlier shall be withdrawn and it has to be reduced from the Cost of Acquisition (COA) of the new house property, i.e. the reduced cost system is followed u/s. 54 of the Income Tax Act, 1961.
4. Sec. 54EC: Exemption for immovable property:
(a) Eligible Assessee: Any person.
(b) Asset to be transferred: Land or Building or both (LTCG only).
(c) Asset to be acquired: Bonds redeemable after 5 years, issued by:
(i) National Highway Authority of India (NHAI); or
(ii) Rural Electrification Corporation Limited (RECL); or
(iii) Power Finance Corporation Limited (PFCL); or
(iv) Indian Railway Finance Corporation Limited (IRFCL).
(d) Time Limit: The above mentioned bonds should be acquired within 6 months from the date of transfer.
(e) CGAS: Not Applicable
(f) Amount of Exemption: Lower of the following: LTCG; or Cost of New Assets
Maximum exemption limit is Rs.50,00,000 for bonds acquired within prescribed time limit.
(g) Lock-in-period: New Assets should not be transferred/converted into money within 5 years from the date of its acquisition. If it is transferred/converted into money within 5 years, then the exemption claimed earlier shall be withdrawn and treated as LTCG in the year in which bonds are transferred/converted into money i.e. full cost system is followed u/s. 54 EC of Income Tax Act, 1961.
5. Sec. 54F: Exemption for Any Long Term Capital Asset (LTCA) (other than residential house property)
(a) Eligible Assessee: Individual/HUF
(b) Asset to be transferred: any LTCA (except residential house property)
(c) Asset to be acquired: One Residential House Property in India.
(d) Time Limit: One residential house property should be purchased within 1 year before or 2 years after the date of transfer or constructed within 3 years after the date of transfer.
(e) Capital Gain Account Scheme (CGAS)/Deposit Scheme: The Assessee (Individual/HUF) should either acquire house property or deposit desired amount in CGAS up to the due date of return filing. The amount deposited should be utilized for the purpose of residential House Property only. If the deposited amount is misutilized, the exemption claimed earlier shall be withdrawn.
(f) Amount of Exemption: (i) if net consideration is fully utilized then capital gain is fully exempt; (ii) if net consideration is partly utilized then capital gain is partly exempt as per the following formula:-
(g) Lock-in-period: New Asset should not be transferred within 3 years from the date of purchase/construction. If it is transferred then exemption claimed earlier shall be withdrawn and treated as LTCG in the year in which new house property is transferred.
Additional conditions to be fulfilled for Sec. 54F:
1. On the date of transfer of LTCA, assesse should not own more than one residential house property; and
2. Assessee should not purchase another house within 2 years or construct within 3 years after the date of transfer.
If the above conditions are not satisfied then exempt capital gain shall be treated as LTCG in the year in which such violation is done.
6. Sec. 54G: Exemption for Land/Building/Plant/Machinery while industry transfer from Urban Area to Rural Area:
(a) Eligible Assessee: Any person.
(b) Transferred Asset: Land/Building/Plant/Machinery (except furniture) in urban area of an industrial undertaking (LTCG and STCG).
(c) Asset to be acquired: New Land/Building/Plant/Machinery (except furniture) in rural area and shifting expenses.
(d) Time Limit: New asset should be acquired within 1 year before the date of transfer or 3 years after the date of transfer.
(e) Capital Gain Account Scheme (CGAS)/Deposit Scheme: The Assessee should acquire the above mentioned assets only or deposit such amount up to the due date of return filing. If it is misutilized, the exemption claimed earlier shall be withdrawn.
(f) Amount of Exemption: Lower of the following: LTCG/STCG; or Cost of new assets/Deposit Amount
(g) Lock-in-period: The new assets should not be transferred within 3 years from the date of its acquisition. If it is transferred, the exemption claimed earlier shall be withdrawn and it has to be reduced from the Cost of Acquisition (COA) of the new house property, i.e. the reduced cost system is followed u/s. 54 of the Income Tax Act, 1961.
7. Sec. 54GA: Exemption for Land/Building/Plant/Machinery while industry transfer from Urban Area to Special Economic Zone (SEZ).
All the points are the same as Sec. 54G (above). The only difference between Sec. 54 G and sec. 54 GA. u/s. 54GA, U/s. 54 G, Plant and machinery acquired in rural area should be new.
U/s. 54GA, Plant and machinery acquired in SEZ may be new or second hand.
8. Sec. 54GB: Exemption for Residential Property or Plot of Land:
(a) Eligible Assessee: Individual/HUF
(b) Transferred Asset: Residential House Property/Residential Plot of Land (LTCG).
(c) Asset to be acquired: Assessee should acquire equity shares of a “new eligible startup company” {defined u/s. 54GB(6)} upto the due date of return filing and company should acquire new plant and machinery {defined u/s. 54GB (6)(d)} within 1 year from the date of subscription of shares.
(d) CGAS:
(i) For Assessee: Not Applicable;
(ii) For eligible startup company: Company should acquire new plant and machinery or deposit desired amount in CGAS upto the due date of return filing of Assesse.
(e) Amount of Exemption:
(i) If net consideration is fully utilized, the capital gain is fully exempt.
(ii) If net consideration is partly utilized, the capital gain is partly exempt as per the following formula.
(f) Lock-in-period: If the equity shares or new plant and machinery are transferred within 5 years from the date of subscription/acquisition, then exempt capital gains taxable in the previous year of transfer of equity share by Assessee or new plant and machinery by company in the hands of eligible assesse as LTCG.
In case of a technology-driven start-up, the lock-in-period for Computer and Computer Software is 3 years and not 5 years.
The idea behind allowing these deductions is that the tax on capital gains tends to erode a substantial amount from the assessee’s income. However, an assessee has the right to plan its affairs in such a manner that may result in as minimum tax as possible. Hence, these deductions in respect of the investments made into a new capital asset, if strategically done, reduces the tax liability of the Assessee.
