List of Capital Gains Exemptions in India
Every investor aims to earn the most from the chances they undertake in the volatile market. However, with every earning or ‘capital gain’ comes hefty taxation. However, multiple sections of the Income Tax Act of India provide provisions for tax exemptions under capital gains.
The Indian government has introduced several provisions that provide exemptions on Capital Gain (CG), enabling taxpayers to save on taxes and invest their earnings into their businesses. This article will examine some of India’s most popular CG exemptions and how they can benefit taxpayers.
What Are Capital Gains?
Capital gains are an investor’s profit after selling a capital asset. In simple terms, it is what an investor earns after selling their capital assets at a price higher than the asset’s purchase price.
Assets of any form, whether stock investments or immovable property, can generate capital gains. These gains are further broadly classified into realised and unrealised capital gains.
The amount one earns from selling their asset is considered a type of income. Therefore, these are taxable and hence become a part of taxable income. Furthermore, the transfer of capital assets should occur during the previous fiscal year to tax an individual’s capital gains during the assessment year or current financial year while filing the Income tax return.
Types of Capital Gains
Capital gains are of two types depending on the holding tenure of assets. They are as follows:
Long-term capital gains
When an individual sells their asset after a holding period of 36 months or more (barring some exceptions), they earn long-term capital gains. In a nutshell, the profits on selling assets after 36 months of purchase are long-term capital gains.
Short-term capital gains
The profits one acquires on selling their asset within 36 months (barring some exceptions) become short-term capital gains.
However, one must remember that the holding period might differ between long-term and short-term assets. For instance, the holding period of immovable assets like houses or land has been reduced to 24 months from 36 months from FY 2017-18.
Sections Under Income Tax Act Stating Capital Gains Exemption
The Income Tax Act 1961 has laid specific provisions for tax exemptions under capital gains. Such provisions assure tax deduction to individuals with total or partial exemptions.
The list below entails the Income Tax Act sections discussing exemptions under capital gains.
- Section 54 of the Income Tax Act
- Section 54 D
- Section 54 B
- Sections 54 E, EA and EB
- Section 54 EC
- Section 54 EE
- Section 54F
- Section 54 G, GA and GB
Section 54 of The Income-tax Act, 1961
Selling a residential property can be a daunting task, especially when it comes to taxes. But Section 54 of the Income Tax Act can save a lot on taxes for property sellers. It allows taxpayers to claim an exemption on the CG arising from the sale of their residential property, subject to certain conditions. You can sell your current property and reinvest the sale proceeds without worrying about paying hefty taxes.
| Section 54 | Explanation |
| Applicability | Section 54 of The Income Tax Act applies to individuals and Hindu Undivided Families (HUFs) who have earned long-term Capital Gain (LTCG) from the sale of a residential property. |
| Conditions for availing the exemption | Such sale proceeds must be invested in purchasing or constructing a residential house property located in India |
| Amount of Exemption | Lower of – 1) Amount of CG earned or 2) The amount invested in the new residential property |
| Time Limit for Investment | The taxpayer has to purchase another residential property within 1 year before or within 2 years after the sale of such residential property or should construct a residential house property within 3 years from the date of such sale. |
| Limitations on the Number of Properties | Allows taxpayers to claim the exemption for the sale of only 2 residential properties in their lifetime, provided the long term capital gain does not exceed Rs. 2 crores. |
| Utilisation of Exemption | If the entire amount of LTCG is not utilised for the purchase of the new residential property, the unutilised portion will be taxable as LTCG in the year of sale of the old property. In other words, if the cost of the new property is less than the LTCG, the taxpayer will have to pay tax on the unutilized amount. |
| Conditions on Transfer of the New Property | If the new residential property is sold within 3 years from its purchase or construction, the exemption claimed will be withdrawn by deducting the amount of exemption earlier provided from the Cost of Acquisition of the new house sold. |
| Other Important Points | It is important to note that it applies only to the sale of residential property and not to commercial properties. Additionally, the exemption is available only for LTCG, which means that gains from the sale of a property held for less than 2 years will not be eligible for exemption under this section. |
Section 54B of The Income-Tax Act, 1961
If a farmer or a rural landowner looking to sell agricultural land might want to take advantage of this section. It offers eligible individuals to reinvest the sale proceeds from their agricultural land into a new agricultural land and get capital gain exemptions.
| Eligibility | Only individuals/HUF who are Indian residents and who sell agricultural land situated in an urban area can avail the benefits. Note: Agricultural land in Rural areas is NOT a Capital asset and hence no CG tax is charged on its transfer. |
| Conditions | The sale proceeds from such urban agricultural land must be used to purchase new agricultural land anywhere in India (whether in urban/rural areas). Further, the capital gain resulting from such transfer can be both Short term or Long term for this section. |
| The time limit of Investment | The entire sale proceeds must be invested in the new agricultural land within 2 years from the date of such sale. |
| Holding Period of the New Land | The new agricultural land must be held for a minimum of 2 years from the date of purchase. If it is sold before the 2 year period, the CG tax exemption will be revoked, and the individual will be required to pay the tax. |
| Exemption limit | The capital gain exemptions is limited to the amount of capital gain or the investment made, whichever is lower. |
| Other Important Points | 1) If an individual has sold multiple agricultural lands, the capital gain exemptions can only be claimed for one such sale in a financial year. 2) If the agricultural land is jointly owned, each owner can claim an exemption in proportion to their share in the land. |
Section 54 D of The Income-Tax Act, 1961
Section 54D of the Income Tax Act provides helps industrialists who face the compulsory acquisition of their property. By investing in a new industrial asset and adhering to the prescribed conditions, they can save on taxes and continue contributing to the growth and development of the industrial sector. So, if you’re facing a compulsory acquisition, don’t despair.
| Section 54D | Explanation |
| Applicability | This exemption is for all the assessees having a capital gain on compulsory acquisition made by the government of Land & Building (L&B) forming part of an Industrial undertaking. |
| Conditions | Assessee must have used such L&B for purposes of the business of industrial undertaking in the 2 years immediately preceding the date of transfer. |
| Time Limit for Investment | Assessee must purchase another L&B or construct any building within 3 years from the date of transfer.Such a purchase should be only for shifting or re-establishing the existing undertaking or setting up a new undertaking. |
| Amount of Exemption | Lower of 1) CG on compulsory acquisition of land or building 2) Amount of investment in acquiring new L&B. |
| Conditions on Transfer of the New Property | If the new residential property is sold within 3 years from its purchase or construction, the capital gain exemptions claimed under Section 54D will be withdrawn by deducting the exemption amount earlier provided from the cost of acquisition of the new asset. |
Section 54 EC of The Income–Tax Act, 1961
This section is for investors looking to minimise their tax liabilities. By providing an exemption from CG tax on the sale of certain assets, it encourages individuals to reinvest their profits in specified bonds, thereby stimulating the economy and driving growth. This provision is crucial for those who are looking to diversify their portfolios.
| Section 54EC | Explanation |
| Applicability | It applies to all assessees who have earned long-term Capital Gain (LTCG) from the sale of an immovable asset – Land or Building. |
| Exemption Limit | The maximum amount of exemption under Section 54EC is limited to Rs. 50 lakh per Financial year and in subsequent Financial years altogether. |
| Eligible Bonds | Only specific bonds notified by the Central Government are eligible for investment under Section 54EC. As of 2023, the eligible bonds are National Highways Authority of India (NHAI) and Rural Electrification Corporation Limited (RECL) bonds. |
| Time limit of Investment | The investment in eligible bonds must be made within 6 months from the date of transfer of the long-term capital asset that generated the LTCG. |
| Holding Period | The eligible bonds if brought before 01/04/2018, then it must be held for a minimum of 3 years from the date of their acquisition. If the eligible bonds are brought after 01/04/2018, then the lock-in period shall be 5 years from date of such acquisition. |
| Tax Exemption | The amount of capital gain exemptions is limited to Rs. 50 lakhs. |
| Transfer of Bonds | The eligible bonds cannot be transferred or pledged as security during the holding period of 3 or 5 years. But, the bonds can be sold or redeemed after the completion of the holding period. |
| Tax Implications on Redemption | If the bonds are redeemed or sold before the completion of the holding period, the LTCG tax exemption claimed will be reversed and the exemption claimed earlier shall be directly taxable as LTCG. |
Section 54F of The Income-Tax Act, 1961
This section offers a golden opportunity to save tax if you invest the sale proceeds from any long-term asset (including residential or commercial property) into specified assets within a certain time frame.
| Section 54F | Explanation |
| Applicability | Section 54F of the I-T Act applies to individuals and HUF who have earned LTCG from the sale of any long-term capital asset other than a residential house property. |
| Conditions for availing of exemption | The sale proceeds must be invested in -A residential house property located in India (the taxpayer should not own more than one residential house property, other than the new asset purchased). |
| Time Limit for Investment | The taxpayer has to purchase another residential property within 1 year before or within 2 years after the sale of such residential property or should construct a residential house property within 3 years from the date of such sale. |
| Investment amount | The entire net sale proceeds must be invested in the specified assets to claim the full exemption. If the entire sale proceeds are not invested, the exemption will be allowed proportionately. |
| Amount of Exemption | The amount of capital gain exemptions is calculated as follows: If the cost of the new asset is equal to or greater than the net sale proceeds, the entire CG is exempt from tax. If the cost of the new asset is less than the net sale proceeds, the CG is proportionately exempt from tax based on the investment amount i.e. – (LTCG/ Net sale consideration) * Investment Amount |
| Conditions on Transfer of the New Property | If the new residential property is sold within 3 years of its purchase or construction, then the amount exempted earlier shall be taxable as LTCG in the year of such transfer. |
Section 54G of The Income-Tax Act, 1961
Section 54G aims to encourage industrial development in the rural areas and SEZ area of the country by providing tax incentives to taxpayers who reinvest their CG in the acquisition of new industrial units in these areas. The provision also helps in the growth of small and medium enterprises, as it provides a tax-efficient way for business owners to expand or relocate their operations.
| SECTION 54G | Explanation |
| Applicability | This capital gain exemption is for all the assessees having an STCG/LTCG on shifting of industrial undertaking from an urban area to a rural area |
| Asset to be Transferred | 1) Plant & Machinery (P&M) 2) Land & Building (L&B)of the Industrial Undertaking |
| Asset to be Purchased | Purchase/Construct of P&M or L&B in such rural area or shifting original assets to that area |
| The time limit for Investment | The assessee has to purchase the specified asset within 1 year before or within 2 years from the date of transfer or should construct the asset within 3 years from the date of such transfer. |
| Amount of Exemption | Lower of 1)CG on the transfer 2)Amount of investment |
| Conditions on Transfer of the New Asset | If the assets acquired by the assessee is transferred within a period of three years from the date of acquisition/construction, then the exemption claimed under Section 54D will be withdrawn by deducting the amount of exemption earlier provided from the Cost of Acquisition of the new asset. |
Note: Section 54GA is exactly similar to Section 54G with the only difference being that the exemption under 54GA is for all the assessees having an STCG/LTCG on shifting of industrial undertaking in an urban area to a Special Economic Zone (SEZ).
Section 54GB of The Income-Tax Act, 1961
This section has been introduced to promote startups in India. The government wants individuals to risk their assets, sell them, and invest such money in their own startups. This provision is a well-thought-out measure by the government to encourage investment in long-term infrastructure projects, which will ultimately benefit the economy as a whole.
| Section 54GB | Explanation |
| Applicability | This capital gain exemption is applicable to Individuals and HUF. Here, only LTCG is covered. |
| Asset to be Transferred | Residential Property (House/plot of land) |
| Asset to be purchased | The net proceeds from the sale of the above-mentioned assets should be used to purchase subscriptions in equity shares of eligible companies. This ensures that the individual has a controlling interest in such a Company. |
| Conditions | Such an eligible company utilizes the amount collected from the subscription for the purchase of a new Plant & Machinery within 1 year from the date of such subscription. |
| The time limit for purchase of shares | Shares should be subscribed up to the due date of filing of Income Tax return. |
| Amount of Exemption | Lower of – 1)(Cost of new Asset/Net Consideration ) *LTCG 2) CG |
| Conditions on Transfer of the Asset | 1) Assessee should not transfer the controlling interest in the equity shares for a period of 5 years from its acquisition and 2) The company should not transfer the new P&M within a period of 5 years from its purchase. |
Summarised List of Capital Gain Exemptions
The list below elaborately details the capital gains exemptions under each section of the Income Tax Act for capital gains.
| Sections of the IT Act | Description | Application | Amount for Deduction |
| 54 | Sale of Residential House/Property, Long-term capital asset (LTCA) by an individual or HUF | Construction is done within 3 years of the sale of the house/property. In case of purchase, It is purchased 1 year prior or 2 years after the property’s sale. | Cost of New property or Long Term Capital Gains (LTCG), whichever is lower. |
| 54F | Sale of any Long Term Capital Asset (LTCA) by an individual or HUF | Construction or purchase of New House Property. The property has been purchased 1 year prior or 2 years after its sale or constructed a new property within 3 years from the date of sale. | Cost of new asset * LTCG/ Net sale consideration |
| 54EC | Sale of any land, building or both as LTCA | There must be an investment within 6 months of transfer. These investments must be made in NHAI and REC bonds. These bonds must be redeemable only after 5 years from the investment date. The amount for investment must be lower than ₹50 lakhs. | Purchase price of the bonds up to ₹50 lakhs, or the capital gains, whichever is lower. |
| 54B | Sale of agricultural land (LTCA/STCA) by an individual or HUF | New agricultural land purchased within 2 years of its sale. The land should be used for agricultural purposes for at least 2 years before the sale. | Agricultural land’s cost or capital gains, whichever is lower. |
| 54D | Compulsory acquisition of land and building used for industrial purposes or undertaking | The acquired land or building must be used for industrial purposes for 2 years before the transfer. Purchase of land or building for shifting or re-establishing industrial undertaking within 3 years of the transfer. | New asset’s cost or capital gains, whichever is lower. |
| 54EE | Investments in units of specified funds | The investment amount in the notified funds should not exceed ₹50 lakhs. The investment must take place within 6 months of the sale of assets and should not be sold till 3 years from the date of investment. | Cost of investment or capital gains, whichever is lower. |
| 54G | The sale or shifting of industrial undertaking from urban to rural areas. | Purchase of new land, building, machinery or plant to shift an industrial undertaking from an urban to a rural area. One must purchase these assets within 1 year prior and 3 years after the sale of assets. These assets can be an LTCA/STCA. | Cost of new assets or capital gains, whichever is lower. |
| 54GA | Shifting an industrial undertaking from an urban area to Special Economic Zone (SEZ) | Purchase of a new plant, machinery, land or building must be done within 1 year before or 3 years after the date of transfer. The sold assets can be LTCA or STCA. | Cost of new assets or capital gains, whichever is lower. |
| 54 GB | Capital Gains from the transfer of residential property if the proceeds are invested into a startup | Such an eligible company utilises the amount collected from the subscription to purchase a new Plant & Machinery within 1 year from the date of such subscription. | Lower of (Cost of new Asset/Net Consideration *LTCG) or Capital Gains. |
Final Word
In conclusion, the capital gain exemption is an important aspect of taxation in India, and understanding the various exemptions available can help taxpayers minimise their tax liability and optimise their investments. It is necessary for novice and experienced investors to be well aware of taxations incurred on different capital gains. Keeping a note of the tax deductions and exemptions under capital gains helps you reduce your tax liabilities and plan your finances effectively.
FAQs
Can I claim capital gains exemption for assets held outside of India?
No, capital gains exemption is only available for assets held in India. If you sell an asset held outside of India, you may be subject to tax in that country and may be eligible for foreign tax credits in India.
Can capital gains exemption be claimed if the asset is gifted?
No, capital gains exemption cannot be claimed if the asset is gifted. When an asset is gifted, the cost of acquisition is the cost to the previous owner, and the holding period is also calculated from the date of acquisition by the previous owner.
Can capital gains exemption be claimed for inherited assets?
Yes, capital gains exemption can be claimed for inherited assets, but the rules for claiming the exemption are different. The holding period for claiming long-term capital gains exemption starts from the date of acquisition by the previous owner, and the cost of acquisition is the cost to the previous owner.
What is the difference between indexation and taxation?
Indexation is the process of adjusting the cost of acquisition of an asset for inflation, while taxation is the process of calculating the tax liability on the capital gains. Indexation helps in reducing the tax liability by increasing the cost of acquisition, which results in a lower capital gain.
What is Capital Gains Account scheme?
The Capital Gains Account Scheme (CGAS) is a bank account that an individual can open with specific financial institutions. CGAS enables the account holders the provision to hold or park their capital gains for a specific period to defer tax liabilities.
What do you mean by net capital gain?
The amount by which a person’s net long-term capital gain for a year exceeds their net short-term capital loss is referred to as net capital gain.
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