Exemptions with a Focus on Section 54 Series: A Full Guide to Capital Gains
Updated: Jan 13
If any residential house is sold in India and any gains arise, they are chargeable to tax. Gain will be calculated as the difference between the sale price and the cost of the asset. If the asset is long term (held for 24 months and more), the rate is 20%, and if it is short-term, it is chargeable at the slab rate applicable to individuals and HUF.
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E.g., if the sale price of the residential house is Rs. 3 crore and the cost of the asset is Rs. 1 crore, assuming the asset is held for more than 24 months, the gains will be Rs. 2 crore (3 crore – 1 crore). Tax payable will be 20% of such gains, i.e., Rs. 40 lakhs. To save tax on this sale of residential property, Section 54 comes into play.
Capital Gains Taxation: A Brief Introduction
Profits from the sale of assets are subject to capital gains taxation, with special consideration given to long-term capital gains (LTCG) and short-term capital gains (STCG). With its advantageous tax treatment, long-term capital gains (LTCG) are applicable to stocks held for more than a year, which promotes long-term thinking. Conversely, STCG applies when assets—including stocks—are sold within a year but with less advantageous tax consequences. With a shorter LTCG holding time, the special treatment for stocks seeks to advance India's equity culture.
Are All Capital Gains Taxable?
Certain capital gains are excluded from taxation due to specific provisions in the tax code. Provisions known as exemptions prevent taxpayers from paying taxes on a few different types of capital gains. Exemptions from paying taxes on income from the sale of capital assets are a part of the capital gains tax system. The following groups are subject to special exclusions.
Resident Individuals Below 60 Years:
Annual Income: Rs. 2.5 Lakh
Resident Individuals 60 Years or Above:
Annual Income: Rs. 3 Lakh
Resident Individuals 80 Years or Above:
Annual Income: Rs. 5 Lakh
Non-Resident Individuals:
Annual Income: Rs. 2.5 Lakh
Hindu Undivided Families (HUF):
Annual Limit: Rs. 2.5 Lakh
If they fulfill the requirements, these exemptions are essential for individuals and HUFs to minimize their tax obligations. The total amount of tax owed on capital gains may be significantly reduced by being aware of and making use of specific exclusions.
Benefits of Being Classified as a Long-Term Capital Asset
For taxpayers, the designation of an asset as a long-term capital asset has several advantages, such as
Reduced Tax Rates: In general, long-term capital gains (LTCG) are taxed at a lower rate than short-term capital gains. The LTCG tax rate is 10% without indexation and 20% with indexation. This is usually better than the individual's relevant income tax rate, which is the short-term capital gains tax rate.
The benefit of Indexation: Taxpayers may gain from indexation, which modifies the asset's purchase price for inflation if the asset is kept for a longer length of time. Taking into account the rise in living expenses during the holding period, this aids in lowering the capital gains tax obligation.
Exemptions under Section 54: The Income Tax Act has a number of provisions (including provisions 54, 54F, and 54EC) that provide deductions or exemptions for long-term capital gains if the proceeds of the sale are reinvested in certain assets, such as bonds or residential real estate. This promotes long-term investments by incentivizing taxpayers to reinvest their earnings.
Capital Gains Account Scheme (CGAS): The sale profits may be put into a bank's Capital Gains Account Scheme (CGAS) if the taxpayer cannot reinvest the funds right away. In this case, the amount deposited is considered a specified investment for exemption purposes. If more money has to be invested, it may be taken out as required.
Beneficial Treatment for Specific Assets: Certain assets, such as equities shares and equity-oriented mutual funds, get restorative tax treatment for long-term profits. As of my previous update, long-term gains on equities shares and stock-oriented mutual funds were tax-free up to a specific amount.
Encouragement of Long-Term Investment: The government incentivizes investors to adopt a long-term investment perspective by taxing long-term returns at a reduced rate. Long-term investments promote stability and development, which may be advantageous for investors as well as the economy.
Various exemptions from Capital Gains of Section 54 Series
Section 54
Subject to certain restrictions, capital gains from the sale of a residential property utilized for residential purposes are excluded under Section 54 of the Income Tax Act. In order to be eligible for this exemption,
Either a person or a Hindu Undivided Family (H.U.F.) must be the assessee.
It was appropriate to hold the residential property for longer than three months.
The acquisition of a new property must occur either 12 months before or 24 months after the sale of the previous property.
As an alternative, a new home may be built within 36 months of selling the previous property.
The money from the sale should be less than the new property costs.
In the year of the old property's sale, if the capital gains are less than the cost of the new property, the difference is considered long-term capital gains and is subject to a 20% tax rate.
The cost of the new property is subtracted from the amount of previously exempt capital gains if it is sold within 36 months of its construction or acquisition. For the year of the new property's sale, the minor difference between the cost and the selling price is recognized as a short-term capital gain.
Section 54B
Gains from the sale of agricultural land in rural regions are not taxed under Capital Gains since such land is not considered a capital asset. Regular transactions involving agricultural property or land used for commercial purposes fall within the retail and profession category, thus free from capital gains tax. In order to be eligible for this exemption:
In non-rural regions, if the property was utilized for agricultural purposes for two years prior to the transfer, individuals or Hindu Undivided Families (HUFs) may be eligible for capital gains exemption under Section 54B.
The seller must buy another piece of agricultural property within two years and not sell it for three years in order to be eligible for the Section 54B exemption.
Under the Capital Gains Account Scheme, deposited capital gains may be claimed for exemption if the buyer is unable to close the deal before submitting the tax return.
Amounts placed that are not used for the purchase of land within the allotted time frame are taxed in the year that the two-year term ends, although they may still be withdrawn for other uses.
Section 54D
Exemption from capital gain under Section 54D for compulsory purchases of land or structures constituting an industrial undertaking. The following requirements must be met by the taxpayer in order for them to be eligible for exemption under Section 54D of the Income Tax Act:
Individuals of any category are eligible for the exemption under Section 54D in the event that land or buildings necessary for an industrial project are acquired via force.
Under Section 54D, both long-term capital assets and short-term capital assets are included.
Prior to the purchase date, the transferred asset had to be used for industrial purposes for at least two years.
The compensation sum must be reinvested by the transferor in another piece of property or structure in order to relocate or reestablish industrial units. This investment has to be made within three years of the compensation date.
If these requirements are satisfied, the assessee may use Section 54D's exemption advantages.
Section 54EC
When reinvested in approved long-term assets, proceeds from the sale of a long-term capital asset may be excluded from taxes. If people decide to reinvest their capital gains in certain assets, such as those provided by the Rural Electrification Corporation or NHAI, they are qualified for these exemptions. To qualify for this exemption from capital gains, one must meet the following criteria:
Within six months of the original asset's sale, individuals are required to reinvest the profits in designated assets.
Reinvesting capital profits should stay within the original investment sum. The exemption only covers the amount reinvested if just a part of the profits are reinvested.
For the capital gain exemption to apply, the designated assets purchased via reinvestment must be held for a minimum of 36 months.
Individuals may take advantage of the long-term capital gain exemption by meeting specific requirements, which promotes thoughtful reinvestment in designated assets.
Section 54EE
Under some circumstances, profits from the transfer of long-term capital assets may be free from capital gains tax.
The individuals must reinvest the transfer funds within six months after the transaction.
The previously granted exemption will be subtracted from the cost of the newly purchased assets to compute capital gains if they are sold within 36 months.
Before the 36-month mark, a loan backed by the new assets will be considered a capital gain.
To be eligible for the exemption, the total amount invested in the current and the next financial year must be more than Rs. 50 Lakh.
Following these guidelines allows people to take advantage of capital gain exemptions, which encourage prudent money management and thoughtful reinvestment.
Section 54F
If capital gains are reinvested in residential real estate, proceeds from the sale of capital assets—apart from residential dwelling properties—may be excluded from capital gains taxes. These exclusions may only be claimed under the following circumstances:
The exemption is available to the assessee, who may be a person or a Hindu Undivided Family (H.U.F).
The new residential property must be built or acquired within 36 months of the capital asset sale date, or it needs to be bought 12 months before or 24 months after the asset sale.
The asset's selling price should be the price of the brand-new house.
If people don't want to reinvest after a certain amount of time, they may register an account under the Capital Gains Scheme and utilize the money for building or buying a home.
A person should own up to one residential property on the asset's selling date. They also should wait to buy another residential property or start building on one within 24 to 36 months of the original date.
Understanding these requirements is essential for those looking to reduce their tax obligations and take advantage of capital gains exemptions—which open up opportunities for wise investment and prevent double taxation. Keep yourself updated on the exemptions that will be in effect in 2022 to maximize financial returns and tax planning.
Section 54G
The transfer of assets, including land and buildings, equipment and machinery, and any right in land and buildings used for an industrial venture in an urban area, is excluded from this rule. The resultant capital gain may be used toward the acquisition or development of real estate, buildings, equipment, and plant and toward costs associated with moving the previous industrial project. Expenditures defined by the government also qualify. “Each and every kind of assessee is eligible for this exemption.”
Conditions to avail of this exemption are:
There are two types of transferred capital assets either short-term or long-term.
Acquisitions of land, buildings, or equipment must be made within a year before to or three years after the transfer date.
The transfer needs to happen as a result of the industrial enterprise moving from an urban region to any other location—that is, outside of urban areas.
The exemption amount is determined by subtracting the capital gain amount from the land, buildings, or equipment investment.
This clause promotes the growth and adaptability of businesses by providing a thorough framework for capital gains exemptions in industrial relocation instances.
Section 54GA
Capital gains on the transfer of capital assets (land, equipment, plant, and buildings) of an industrial business situated in an urban area are excluded under section 54GA of the Income Tax Act. The industrial venture must relocate to a Special Economic Zone (SEZ) in order to qualify for this exemption. Prerequisites for the Exemption are:
Section 54GA allows all types of people to seek exemption.
Under Section 54GA, capital gains, both long-term and short-term, are excluded.
An exemption is available for the transfer of any equipment, land, or building rights as long as the industrial activity is located in an urban area and the property is used for commercial purposes.
The amount of the capital gain may be used to finance the industrial undertaking's relocation to a Special Economic Zone for a number of reasons, such as buying equipment or machinery, obtaining land, building a new facility or buying an existing one, and incurring additional costs specifically associated with the relocation.
The funds must be invested one year before the transfer date or within three years after it.
For a period of three years from the date of acquisition, construction, or transfer, the claimant is not permitted to transfer the recently acquired, bought, built, or transferred asset.
This provision seeks to promote the relocation of industrial projects to Special Economic Zones by offering a favorable tax environment and stimulating company expansion and economic development.
Section 54GB
When transferring a long-term residential property, individuals or Hindu Undivided Families (HUFs) may claim exemption from capital gains tax under Section 54GB of the Income Tax Act, 1961. This exemption is valid provided that the net proceeds from the sale of the property are used to purchase equity shares from a qualified business that produces products or articles. Prerequisites for the Exemption are:
A residential property, such as a home or piece of land, must be transferred to realize the capital gain.
The capital gain must apply to an individual or Hindu Undivided Family (HUF).
The net consideration amount should be invested in the subscription of equity shares of qualifying start-ups by the individual or HUF. Section 54 governs the exempted component if it is not entirely used.
Upon receipt of the investment, the firm must use the share capital in newly qualifying assets within a year after the subscription date.
Within five years of the purchase date, neither the company's assets nor its equity shares may be sold or transferred by the business, a person, or HUF.
Incentives for investing in qualified start-ups are provided by Section 54GB, which also offers a tax-efficient way to use capital gains from residential real estate transactions. This promotes innovation and entrepreneurship.
Capital Gain Account Scheme
The Indian Government, via the Ministry of Finance, has a system called as the "Capital Gain Account Scheme 1988." Taxpayers may benefit from an exemption from capital gains tax under this program. In order to get this benefit, taxpayers must deposit the net consideration or capital gains amount into a public sector bank before the deadline for completing their income tax return. To put it another way, it's a method wherein individuals may avoid paying Capital Gains tax by depositing their money into a designated bank account before filing their tax return.
Budget 2023 and Section 54:
Income is classified as capital gains if a capital asset is transferred during a particular year. The tax rules provide exemptions if capital gains are invested in certain ways specified in the applicable sections of the law to promote investment.
For such exemptions, Sections 54, 54EC, and 54F are often used. Recent changes, nonetheless, intend to cap these exemptions at Rs. 10 crore. This implies that the highest exemption that may be claimed will be set at ten crores, even if the investment amount surpasses ten crores.
For example, under Section 54, the maximum deduction that may be claimed is limited to 10 crores if the cost of the newly bought asset exceeds ten crores. Therefore, the exemption amount will be capped at ten crores in the event that the taxpayer acquires a new home for 18 crores and the gain amount is 18 crores.
Likewise, the highest deduction permitted under Section 54F is ten crores. Any amount invested beyond this limit will not be considered. A proviso has been included to guarantee that the net consideration amount exceeding Rs. 10 crores would not be taken into account while determining the exemption under this clause. The purpose of this modification is to provide consistency and a ceiling on the capital gains exemptions allowed under these provisions.
Amount of Exemption Under Section 54:
Following Section 54 of the Income Tax Act, the amount of long-term capital gains that are not taxed is the lesser of the capital gains from selling a residential property or the investment made in buying or building a new residential property. Any cash gains that are still left over will be taxed.
As an example:
Take the case of Mr. A, who sells his house for Rs. 50,000,000/-. His investment is Rs. 25,00,000/- in a brand-new house. This is how the math would work:
Particulars | Amount (Rs) |
Capital gain on transfer of property | 50,00,000.00 |
Less: Investment in new property | 25,00,000.00 |
Balance - Taxable Capital Gains | 25,00,000.00 |
In this instance, the exemption would be equal to the lesser of the investment in the new property (Rs. 25,00,000) or the capital gains (Rs. 50,00,000), for a total exemption of Rs. 25,00,000.
Comparison Between Various Sections of Exemption from Capital Gains
Section | Eligible Assessee | Property Type | Holding Period | Reinvestment Period | Exemption Conditions |
54 | Individual or HUF | Residential Property | > 3 months | 12 months before or 24 months after | Sale proceeds < cost of new property; Difference considered long-term capital gains, 20% tax rate |
54B | Individual or HUF | Agricultural Land (Non-rural) | 2 years for agricultural use | Buy another within 2 years, not sell for 3 years | Exemption under Capital Gains Account Scheme; Deposit conditions apply |
54D | Individual | Industrial Land/Building | > 2 years for industrial use | Reinvest within 3 years of compensation date | Exemption for compulsory purchases related to industrial undertaking |
54EC | Individual or HUF | Long-term Capital Asset | N/A | Reinvest within 6 months in approved assets | Exemption for proceeds reinvested in designated assets, held for a minimum of 36 months |
54EE | Individual or HUF | Long-term Capital Asset | N/A | Reinvest within 6 months | Exemption for reinvested transfer funds; Partial reinvestment not covered |
54F | Individual or HUF | Capital Assets (excluding residential properties) | 36 months | 12 months before or 24 months after | Reinvest in residential property; Construct or acquire within 36 months; Own one property on sale date |
54G | All Assessees | Assets used for industrial venture in urban areas | Short-term or long-term | Within 1 year before or 3 years after | Exemption for industrial relocation expenses; Amount determined by subtracting capital gain from investment |
54GA | All Assessees | Capital assets of industrial business in urban area | Short-term or long-term | Invest 1 year before or 3 years after | Exemption for relocation to Special Economic Zone (SEZ); No transfer for 3 years from acquisition, construction, or transfer |
54GB | Individual or HUF | Long-term Residential Property | N/A | Invest in equity shares within 1 year | Exemption for investing in qualifying start-ups; Holding period of equity shares for 5 years |
Eligible persons: Individuals and HUF
The following conditions need to be satisfied:
There should be a transfer of residential house
It must be a long-term capital asset (held for 24 months or more).
Income from such a house should be chargeable under the heading "Income from house property."
The new residential house should be in India. The seller cannot buy or purchase a residential house abroad and claim the exemption.
From April 1, 2023, the capital gains tax exemption under Sections 54 to 54F will be restricted to Rs. 10 crore.
All of the above conditions need to be satisfied for an exemption from capital gains.
What if an asset transfers within 3 years?
If the new asset is transferred before 3 years from the date of its acquisition or construction, then the cost of the asset will be reduced by capital gains exempted earlier for computing capital gains. In short, you have to forego the capital gain exemption benefit claimed earlier.
Continuing the previous example,
If the new house was sold after 1 year for 5 crore, then the short-term capital gain chargeable to tax would be
Particulars | Amount |
Net Consideration (sale value) | 5 crore |
Less: Cost of acquisition minus capital gains exempt earlier (3.5 crore – 3 crore). | 0.5 |
Short-term capital gains are chargeable to tax. | 4.5 Crore |
Section 54 EC: Capital Gains Exemption through Investment in Certain Bonds
Any long-term capital gain arising from the sale of immovable property (land or buildings) is chargeable to tax at 20%. However, you get an exemption from such gains if you invest in certain bonds issued by the central government.
* Eligible person: Any person.
The following conditions need to be satisfied:
There should be a transfer of a long-term capital asset (held for 24 months or more), be it land, a building, or both.
The capital gains arising from such a transfer (sale) should be invested in a long-term specified asset within 6 months from the date of the transfer (sale).
Such an investment can be redeemed only after 5 years.
The maximum amount of exemption available is Rs. 50 lakh.
Eligible bonds under Section 54EC:
National Highways Authority of India (NHAI)
Rural Electrification Corporation Limited (RECL)
Any other bond notified by the Central Government on this behalf
E.g., If the land is sold for Rs. 80 lakhs after being held for 3 years at the indexed cost of acquisition of Rs. 50 lakhs, LTCG is taxable at 30 lakhs. If an investment of Rs. 30 lakhs is made in the eligible bonds mentioned above, the LCTG chargeable to tax will be nil.
Wrapping up, Section 54 provides a crucial exemption to save tax on the sale of residential property. To claim this exemption, certain conditions need to be satisfied. From April 1, 2023, the exemption limit for capital gains under Sections 54 to 54F will be restricted to Rs. 10 crore. Additionally, Section 54 EC offers an exemption from long-term capital gains tax if invested in certain specified bonds within 6 months of the sale. It is essential to understand these provisions to maximize the benefits and minimize tax liability.
