CAPITAL GAINS-WHEN AND WHAT EXTENT EXEMPT FROM TAX
103.The Income tax Act grants total/partial exemption of capital gains under section
54,54B,54D,54EC,54EE,54F,54G,54GA,54GB,and54H
These provisions are explained in paras 103.1 to 103.8.It is possible to available multiple
exemption
under these section .However
the aggregate amount of exemption cannot exceed quantum of capital gain.
103.1 Capital gains arising from the transfer of residential house property[Sec.54]-
The provisions section 54 are given below-
| Who claim Exemption |
An individual or a Hindu undivided family |
| Which specific asset is eligible for exemption |
If a residential house property (long-term) is transferred |
| Which asset the taxpayer should acquire to get the benefit of exemption |
Exemption is available if one residential house is purchased or structed in India |
| What is time-limit for acquiring the new asset# |
purchase-Residential house can be purchased within 1year before transfer or within
2years
after
transfer
construction-Residential house can be constructed within 3years from transfer.For bank
deposit,see para 103.1-1
In the case of compulsory acquisition,these time-limits shall be determined from the
date of
receipt of compensation
(original or additional) |
| How much is exempt |
Investment in the new asset or capital gain,whichever is lower. |
| Is it possible to revoke the exemption in a subsequent year. |
If the new asset is transferred within 3years of its acquisition,exemption will be taken
back.
For calculating capital gain on transfer of new asset, cost of acquisition will be
calculated
(as original cost of acquisition
exemption available under section 54).
|
103.1-1SCHEME OF DEPOSIT-If the new asset is not Acquired up to the due date of submission
of
return of income then
the taxpayer will have to deposit the money in"Capital gain deposit account scheme"with a
nationalised
bank or IDBI.On the basis
of actual investments and the amount deposited in the deposit account, exemption will be given
to
the
taxpayer.
The Taxpayer can acquire the new asset by withdrawing from the deposit account.But the new asset
should
be acquired within the
time-limit mentioned in the relevant section.If the deposit account is not fully utilized for
acquiring
the new asset,the unutilised
amount[but in case of section 54F it is proportinate unutilised amount] will become chargeable
to
tax in
the previous year in which the
Specified time-limit for making investment in then new asset expires[in case of section 54 and
54F
when
the 3years time limit expires].
It will be taxable as short-term/long-term capital gain depending upon the original capital
gain.The
unutilised amount can be withdrawn
by the taxpayer after the expiry of the aforesaid time limits if the taxpayer dies before the
expiry
of
specified time-limits(for making
investment in the new asset),then unutilised amount paid to the legal heirs is not taxable in
the
hands
of recipient.
103.1-2OTHER POINTS-A few points which are relevant for availing exemption under section
54
are
given below-
construction of the residential house should be completed within 3years from the date of
transfer.Date
of commencement of
construction is irrelevant. construction may be commenced even before the transfer. Date of case
of
allotment of flat under the
self-financing scheme of DDA(or similar scheme of co-operative societies or other institution)is
treated
as constructed of house
for this purpose.
Investment in residential house would not only include cost of purchase of house but also cost
incurred
for making house habitable.
Holding of legal title is not necessary.If the taxpayer pays full consideration or substantial
portion
of it(in terms of the
purchase agreement)within the period given above,the exemption under section 54 is
available.This
rule
is applicable even if possession
is handed over after the stipulated period or the sale deed is registered later on
purchase of tenancy right in a building,does not amount to purchase of house property and
exemption
under section 54 is not available.
A taxpayer may sell two house properties and he may purchase one house property for the purpose
of
availing the exemption.
Exemption under section 54 can be claimed even in the case of an assessee who has opted for the
alternative tax regime under
section 115BAC.
Problems-
103.1-p1X and Y give the following information-
| Residential house property situated at Delhi |
X RS. |
Y Rs. |
| Date of transfer |
July 10,2022 |
September 19,2022 |
| Date of purchase |
october 6,2004 |
April 10,2003 |
| Sale consideration |
13,00,000 |
14,50,000 |
| Stamp duty value |
(15,00,000) |
(17,50,000) |
| Cost of acquisition |
1,87,000 |
3,75,000 |
| Expenses on transfer |
10,000 |
6,000 |
| To get exemption under section 54,the following residential house properties are
purchased
by X
and Y at Noida- |
| Date of purchase |
December20,2022 |
July1,2022 |
| Cost of acquisition |
12,00,000 |
16,00,000 |
| X and Y transfer their house properties at Noida as follows: |
| Sale of consideration |
20,00,000 |
16,85,000 |
| Stamp duty value |
23,20,000 |
16,10,000 |
| Date of transfer |
December25,2024 |
May20,2024 |
| Find out the capital gain chargeable to tax in the hands of X for different assessment
years.
|
Solution:Assessment year 2023-24 |
| Sale consideration(stamp duty value is taken,as it exceeds 110%of actual sale
consideration)
|
|
Rs.15,00,000 |
| Less: |
| Indexed cost of acquisition [Rs.1,87,000x331/113 |
|
5,47,761 |
| Expenses on transfer |
|
10,000 |
| Balance |
|
9,42,239 |
| Less:Exemption under section 54[amount of investment in new residential property
i.e,Rs.12,00,000or amount of capital
gain,i.e,Rs.9,42,239,whichever is lower]
|
|
9,42,239 |
| Long-term capital gains |
| Assessment year 2025-26 |
|
Nil |
| Sale of consideration(stamp duty value is taken,as it exceeds 110%of actual sale
consideration)
|
|
23,20,000 |
| Less:Indexed cost of acquisition[see note] |
|
2,80,344 |
| Long-term capital gain |
|
20,39,656 |
Note:-Noida property is transferred within 3 years from its acquisition.Exemption claimed under
section
54 will be
revoked cost of acquisition will be taken as Rs.2,57,761(i.e., Rs.12,00,00 minus exemption to be
taken
back:Rs.9,42,239)
Since Noida property is transferred after 2 years,it will be long-term capital asset amd
indexation
benefit will be available
Indexed cost of acquisition will be Rs. 2,80.344[cost of acquisition Rs.2,57,761xCII of 2024-25
being
year of transfer:360(assumed
figure)/CIIof 2022-23 being year of acquisition:331].
103.2 capital gains arising from the lands used for Agriculture purpose [sec.54B]-The
provision of
section 54B are given below
| Who can Claim exemption |
Individual or Hindu undivided family |
| Which specific asset is eligible for exemption |
Any short-term or long-term capital asset(being agriculture land),if it was used by the
individual(or his parents)
[or by the Hindu undivided family] for agriculture purpose for 2years immediately prior
to
transfer
|
| Which asset the taxpayer should acquire to get the benefit of exemption |
Agriculture land(may be in rural area or urban area) |
| What is time limit for acquiring the new asset |
Within 2years from the date of transfer.For bank deposit,see para 103.1-1 |
| Is it possible to revoke the exemption |
If the new asset is transferred within 3years of its acquisition,exemption will be taken
back.For calculating capital
gain on transfer of new asset,cost of acquisition will be calculated as(original cost of
acquisition-exemption available
under section 54B)
|
| Is it possible to claim exemption if the assessee has opted for alternative tax regime
under
section 115BAC |
Exemption is available |
103.2-p1X sells agriculture land situated within the municipal limits of calcutta for
RS.50,00,000(Stamp duty value as per circle
rate:Rs.38,75,000)on July 4,2022,which was purchased by him on March 1,2007 for Rs.13,40,820.On
July
15,2023,he purchase agriculture lands
in rural area for Rs.4,30,000 and deposit Rs.10,80,000 in a deposit account for availing
exemption
under
section 54B.He purchases another
agriculture land(Situated within the limit of Delhi municipal corporation)on june 30,2024 for
Rs.8,47,000 by withdrawing from the deposit
account.Amount left in the deposit account is withdrawing on July 10,2024.The Agricultural land
in
If
the limits expire during March20,2020
and september 29,2020,it has been extended to september 30,2020 by virtue of the Taxation and
other
laws(Relaxation and Amendment of Certain
provision)Act,2020. Moreover,if the time limit expires during April 1,2021 and september
29,2021,it
has
been extended(vide -Circular no.12/2021
dated June 25,2021)to september 30,2021.Rural area is transferred on April 1,2025 for
Rs.4,90,000
and
land in Delhi is Transferred on July
17,2025 for 8,70,000.Determine the amount of capital gains.
Solution-year 2023-24
| Sale proceeds |
Rs.50,00,000 |
| Less:Indexed cost of acquisition[Rs.12,84,109x331/122] |
34,83,935 |
| Balance |
15,16,065 |
| Less:Exemption under section 54B |
| -Cost of agricultural land purchased on July15,2023 |
4,30,000 |
| -Amount deposited in the deposit account |
10,80,000 |
| Long term capital gains |
6,065 |
| Assessment year 2025-26(i.e.,relevant to the previous year which 2 years from the date
agricultural land expire) |
| Amount Deposited in the deposit account |
10,80,000 |
| Less:Amount Utilised in purchasing Agricultural land up to July 3,2024 |
8,47,000 |
| Long-term capital gains |
2,33,000 |
| Assessment year 2026-27(i.e.,relevant to the previous year 2025-26 in which the new
asset
are
transferred before the expire
of 3Years)
|
|
Agricultural land in rural area Rs. |
Agricultural land in urban area RS. |
| Sale proceeds |
4,90,000 |
8,70,000 |
| Less:Cost of acquisition after deduction of the amount of exemption under section 54B as
the
assets are transferred
within 3years[i.e.,Rs.4,30,000-Rs.4,30,000;Rs.8,47,000]
|
NiL |
NiL |
| Short-term capital gain |
Not taxable |
8,70,000 |
102.2-E1 X sells Agricultural land in municipal limits of Delhi for Rs.9,00,000 on August 13,2022
which
was acquired by him in 1970
Fair market value of the land on April 1,2001 was Rs.40,000.To avail Exemption under section
54B,he
deposits Rs.4,10,000on July 31,2023
in a deposit account By withdrawing from the deposit account,He purchases agricultural land on
August
15,2024 for Rs.3,45,000.Determine
the amount of capital gain chargeable to tax for the assessment years 2023-24 and 2025-26.Does
it
make
any difference if the land which
is sold on August 13,2022,is situated in a rural area ?
103.3 Capital gains on compulsory acquisition of land and building,forming part of industrial
undertaking[sec.54D]- The provision
of section 54D are given below-
| Who claim exemption |
Any taxpayer |
| Which specific asset is eligible for exemption |
Land or building(short-term or long-term)forming part of an industrial undertaking which
is
compulsory acquired by the
Government and which is used 2years for industrial purpose prior to its acquisition
|
| Which asset the taxpayer should acquire to get the benefit of exemption |
Land or building for industrial purpose |
| What is time limit for acquiring the new asset |
Within 3years from the date of receipt of compensation.For bank deposit,see para 103.1-1
|
| How much is exempt |
Investment in the new asset or capital gain,whichever is lower.The new asset should not
be
transferred within 3years
from the date of acquisition of the new asset
|
| Is it possible to revoke the exemption |
If the new asset is transferred within 3years of its acquisition,exemption will be taken
back.for calculating
capital gain on transfer of new asset cost of acquisition will be calculated as(original
cost of
acquisition-exemption
availed under section 54D)
|
| Is it possible to claim exemption if the assessee has opted for alternative tax regime
|
Exemption is available |
103.1-p1X Ltd.,a manufacturing company,purchases a factory building on may 6,1998 for
RS.20
lakh(prior to this the company
used the same building as a tenant for about 5years).The building is compulsory acquired by the
Government on April 20,2022for
which a sum of Rs.60 lakh is paid as compensation on March 14,2023.Compute the amount of capital
gains
chargeable to tax for the
assessment year 2023-24 taking into consideration the following information-
1.On April 1,2022,the company owns two building (rate of depreciation: 10 per cent)one of which
is
acquired by the Government
during 2022-23.The depreciation value of the block on April 1,2022 is Rs.21.35 lakh.
2.The company purchase a factory building on April 6,2023 for Rs.15 Lakh.
Does it make difference if the factory building is purchased on march 31,2023?
Solution:As the compensation is received on March14,2023,capital gain is taxable for the
assessment year2023-24as follows-
| Sale consideration |
Rs.60,00,000 |
| Less:Cost of acquisition as per section 51 being the depreciated value of the block on
April
1,2022[see para101.3] |
21,35,000 |
| Short-term capital gain |
38,65,000 |
| Less:Exemption under section 54D[as the taxpayer has purchased a factory building within
3years
from March 14,2023
Exemption is available under section 54D,The exemption being Rs.15lakh] |
15,00,000 |
| Short-term capital gain chargeable to tax for the assessment year 2023-24 |
23,65,000 |
| In the case,the amount of capital gain will be reduced if the new building is purchased
in
the
previous year2022-23(i.e.,
in the year in which the old building was acquired by the Government).Suppose the new
building
is purchased on march 31,2023
then as per section 50,the cost of acquisition of the building acquired by the
Government
will
increase and the capital gains
shall be determined as follows-
|
| Sale consideration |
Rs.60,00,000 |
| Less:Cost of acquisition as per section 50[being the depreciated value of block on
April
1,2022and cost of building
purchased during 2022-23,i.e.,Rs.21.35lakh+Rs.15lakh ]
|
36,35,000 |
| Short-term capital gain |
23,65,000 |
| Less:Exemption under section54D |
15,00,000 |
Short-term capital gain |
8,65,000 |
103.4 Capital gains on transfer of any long-term capital asset on the basis of investement in
certain bonds [Sec 54EC]-
The Provisions of Section 54EC are given below-
| Who Can Claim Exemption |
Any taxpayer |
| Which specific asset is eligible for exemption |
Long-Term Capital asset (being land or building or both) (maybe residential or
commercial,maybe situated in India or outside India ) |
| Which asset the taxpayer should acquire to get the benefit of exemption |
Bonds National Highways Authority of India(NHAI) or Rural Electrification
Corporation(REC)or
notified bonds.Maximum investement
in one Financial year is Rs.50Lakh More over,investement made by an assessee in the
NHAI/REC
bonds/notified bonds,out of capital
gains arising from transfer of one of more original asset,during the financial year
which
the original asset or assets are transferred
and in the subsequent financial year should not exceed Rs.50Lakh |
| What is time limit for acquiring the new asset |
within 6 months from the date of transfer |
| How much is exempt |
Investment the new asset or Capital gain,whichever is lower.The new asset should not be
transferred within 5Years. |
| Is it possible to revoke the exemption |
In the following cases,exemption will be taken back(and the amount of exemption given
earlier will become long-term
capital gain of the year in Which the assessee commits the following default)-
|
| Is it possible to Claim exemption if the assessee has opted for alternative tax regime
|
Exemption is available |
103.4A Capital gain not to be charged on investement in units of a specified funds
[sec.54EE]-The provisions of section 54EE are given below
1.The assessee has transferred a long-term Capital asset.
2..He has invested the whole (or any part) of capital gains in long-term specified asset (to be
notified by the Central Government to finance
start-ups).Such investement can be made at any time within 6 months from the date to transfer of
original asset.The amount of such investement(made on
after April 1,2016) by an assessee during any financial year cannot exceed
Rs.50lakh.Moreover,investement made by an assets,during the financial year in which
the original asset or assets are transferred and in the subsequent financial year should not
exceed
Rs.50 lakh.
Amount of exemption -Amount of exemption under section 54EE is the amount of capital gain or
amount
invested in long-term
specified assets,whichever is lower
Revocation of exemption -The long-term specified assets should not be transferred (not even loan
or
advance is taken on
security of such assets) within 3 years from the date of acquisition.If long-term specified
asset
are transferred(or loan
or advance is taken on security of such assets) within 3 years,the amount of exemption given
earlier
will be revoked and it
shall be chargeable to tax as long-term capital gain in the year in which such specified assets
are
transferred(or loan advance
is taken).
|
construction-Residential house can be constructed within 3 years from transfer.For bank
deposit,see
para 103.1-1,for
other relevant points,see para 103.1-2 In the case of compulsory acquisition,these
time-limits shall
be determined from the
date of receipt of compensation (original or additional)
|
| How much is exempt |
Investment in the new asset/Net sale consideration x Capital gain,Amount of exemption
cannot exceed
capital gain |
| Is it possible to revoke the exemption |
In the following cases,exemption will be taken back(and the amount of exemption given
earlier will
become
long-term capital gain of the year in which the assessee commits the following default)-
If the new asset is transferred within 3years from the date of its acquisition
If within 2 years from the date of transfer of the original assets,the taxpayer
purchases
another residential
house property in India or outside India
If within 3 years from the date of transfer of original assets,the taxpayer
completes
construction of another
residential house property in India or outside India.
|
| Is it possible to Claim exemption if the assessee has opted for alternative tax regime
under section
115BAC |
Exemption is available. |
103.6 Capital gain arising on transfer of asset in cases of shifting of industrial undertaking
from urban
area to rural
area [sec.54G]-The provision of section 54G are given below-
| Who can claim exemption |
Any taxpayer |
| Which specific asset is eligible for exemption |
On transfer of short-term/long-term capital assets being land,building,plant or
machin-ery These
assets should be
transferred in order to shift an industrial undertaking from an urban area to a rural
area.
|
| Which asset the taxpayer should acquire to get the benefit of exemption |
Land,building plant or machinery in order to shift undertaking to a rural area. |
| what is time limit for acquiring the new asset |
New asset should be purchased within 1 year before transfer or within 3 years after
transfer of the
original asset.
For scheme of deposits,see para 103.1-1
|
| How much is exempt |
Investment in the new asset or capital gain,whichever is lower. |
| Is it possible to revoke the exemption in a subsequent year. |
If the new asset is transferred within 3 years of its acquisition,exemption will be
taken back For
calculating
Capital gain on transfer of new asset,cost of acquisition will be(original cost of
acquisition-exemption availed
under section 54G). |
| Is it possible to claim exemption of the assessee has opted for alternative tax. |
Exemption is available. |
103.7 Capital gains on transfer of assets in cases of shifting of industrial undertaking from
urban area
to any
special Economic Zone [Sec.54GA]- provisions of Section 54GA are given below-
| who can claim exemption |
Any taxpayer |
| which Specific asset is eligible for exemption |
On transfer of short-term/long-term Capital assets being land,building,Plant or
machinery.These
assets should be
transferred in order to shift an industrial undertaking from an urban area to any
special Economic
Zone
|
| Which asset the taxpayer should acquire to get the benefit of exemption |
Land,building plant or machinery in order to shift undertaking to any special economic
zone. |
| What is time limit for acquiring the new asset |
New asset should be purchased within 1 year before transfer within 3 years after
transfer of the
original asset.
For scheme of deposit,see para 103.1-1
|
| How much is exempt Is it possible to revoke the exemption in a subsequent year |
Investement in the new asset or Capital gain,whichever is lower.If the new asset is
transferred
within 3 years of installed
acquisition,exemption will be taken back.For calculating Capital gains on transfer of
new asset,cost
of acquisition will be
(original cost of acquisition-exemption availed under section 54GA).
|
| Is it possible to claim exemption if the assessee has opted for alternative tax regime
|
Exemption is available. |
103.8 Capital gain on transfer of residential property [Sec54GB]-The provisions of section
54GB are
given below-
| Who can claim exemption |
An individual or a Hindu undivided family |
| Which specified asset is Eligible for exemption |
On transfer of a long-term residential property(a house or a plot of land)if transfer
takes place
during April 1,2012
and march 31,2017(in case of an investement in eligible start-up,the residential
property can be
transferred up to
March 31,2022)
|
| Which asset the taxpayer should acquire to get benefit of exemption |
Equity shares in an "eligible company" |
| What is the time-limit for acquiring the new asset |
Equity Shares in an "Eligible company"should be acquired on or before the due date of
furnishing of
return of income
under section 139(1).The "eligible company"should utilize this amount for the purchase
of a"new
asset"within one year
from the date of Subscription in equity shares.For bank deposit,see para 103.8-1
|
| How much is exempt |
Investement in "new asset" by the eligible company/Net sale consideration x Capital
gain.Exemption
cannot exceed capital
gain |
| Is it possible to revoke the exemption |
In the following cases,exemption will be taken back and the amount of exemption(or
proportinate
exemption)given earlier
under section 54GB will become long-term Capital gain of the assessee(i.e., transferor
of
residential property).It shall
be taxable in the year in which the assessee or the eligible company commits the
following defaults-
1.If the equity shares in the eligible company are sold or otherwise transferred by
the assessee
within 5 years
from the date of acquisition
2.If the "new asset" is sold or otherwise transferred by the eligible company within
the period
given below-
In the case of a "new asset" being computer or computer software acquired by an
eligible
start-up: within
3years from the date of acquisition
In the case of any other"new asset" within 5 years from the date of acquisition.
3.If the deposit account is not Utilized fully or partly by the eligible company for
purchasing
the new asset within
1 year from the date of subscription in equity shares (by the assessee)
|
| Is it possible to claim exemption if the assessee has opted for alternative tax regime
under section
115BAC |
Exemption is available |
103.8-1 Bank DEPOSIT-The "eligible company" Should utilize the amount Subscribed by the
transferor for
the purchase of
a "new asset" within one year from the date of subscription in Equity shares.If,however,the
company does not
utilize this amount
for the purchase of a "new asset" before the due date of furnishing of return of income by the
assessee(i.e.,transferor of residential
property),it shall be deposited by the company in capital gain deposit account In such a
case,exemption
would be available on the basis
of amount deposited in the deposit account
103.8-2OTHER RELEVANT POINTS-Other relevant points for this section are given below-
Net sale consideration-Net sale consideration is sale consideration minus expenditure on
transfer incurred
by the
transferor.
"Eligible Company"-It means a company which satisfies the following conditions-
1.It is incorporated on or after April 1(of the previous year in which residential property is
transferred)
but on or before
the due date of submission of return of income under section 139(1)by the assessee(i.e.,
transferor of
residential property).
2.It is engaged in the business of manufacture of any article or thing or in an eligible
business.
3.The assessee(i.e.,transferor of residential property)has more than 25 per cent share capita(or
voting
right of After
subscription in shares by the assessee).
4.The company qualifies to be a SMS(i.e.,small or medium enterprise under the Micro,Small and
Medium
Enterprise Act,2006)
(i.e.,Where the investement in plant and machinery is more than Rs.25 Lakh but not more than
Rs.10
Crore).Alternatively,the
company is an eligible start-up.
What is new asset-It means new plant and machinery.However,it does not include the
following:(a)any plant or
machinery which is
used in India or outside India by any person before its installation by the eligible company;(b)
any plant
or machinery which is
installed in office premises/residential accommodation/guesthouse;(c)any office
appliance;(d)Computers/computer software;(e)any
vehicle;and (f)any plant or machinery which is allowed 100 per cent deduction (by depreciation
or
otherwise)in any previous year.
What is "eligible start-up" or "eligible business"-"Eligible business" means a business which
involves
innovation,development,
deployment or commercialisation of new product,processes or service driven by technology or
intellectual
property."Eligible start-up"
means a company engaged in eligible business and satisfies the following conditions-
1.it is incorporated during April 1,2016 and March 31,2022.
The total turnover of its business does not exceed Rs.25 crore(Rs.100 crore,with effect from the
assessment
year 2021-22)in any of the
previous year during April 1,2016 and March 31,2022.
3.It holds a certificate of eligible business from the Inter-Ministerial Board of certification
as notified
by the Central
Government.
103.9 extension of time limit for acquiring new asset[Sec.54H]-The Cumulative impact of
section 45(5)
and 54H is
given below-
1.Initial compensation-Capital gain is chargeable to tax in the previous year in which the
compensation(or
part there of)
is first received.within time-limit specified for this purpose.But the Specified time-limit
shall be
determined from the
date of receipt of compensation.If initial compensation is received in parts,then the entire
Initial
compensation is taxable
in the year in which a part is first received,but the time-limit for acquiring the new asset
under sections
54,54B,54D,54ECand
54F shall be determined on the basis of date receipt of different parts of initial compensation.
2.Enhanced compensation-If any enhanced compensation is received,it is taxable in the year in
which such
compensation is received
and for acquiring the new asset under section 54,54B,54D,54EC,and 54F,the time-limit shall be
determined
from the date of receipt
od additional compensation.