Long-Term Capital Gains Tax Exemption – List of Exemptions as per IT Act
Every investor’s aim is 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.
These can help investors to plan the holding period of their assets accordingly. Read along for a detailed insight into capital gain exemptions present in the IT Act.
What Are Capital Gains?
Capital gains is the profit that an investor makes after selling a capital asset. In simple terms, it is what an investor earns after selling his/her capital assets at a price higher than the purchase price of the asset.
Assets of any form, whether they are stock investments or immovable property, can generate capital gains. These gains are further broadly classified into realized and unrealized capital gains.
The amount one earns from selling his/her asset is considered to be 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.
What Are the 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), he/she earns long-term capital gains. In a nutshell, the profits one makes 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 sections of the Income Tax Act that discuss exemptions under capital gains.
- Section 54 of the Income Tax Act
- Sections 54 E, EA and EB
- Section 54 EC
- Section 54 EE
- Section 54F
- Section 54 G, GA and GB
List of Exemptions under Capital Gain
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 done within 3 years of 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. Purchase of the property has been done 1 year prior or 2 years after its sale. 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 date of investment. The amount for investment must be lower than ₹50 lakhs. | Purchase price of the bonds upto ₹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 prior to the transfer. Purchase of land or building for shifting or re-establishing industrial undertaking within 3 years of 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 | Sale or shifting of industrial undertaking from urban to rural area | 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 a 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. |
Final Words
It is necessary for novice and experienced investors to be well aware of taxations incurred on different types of capital gains. Keeping a note of the tax deductions and exemptions under capital gains might also help you reduce your tax liabilities and plan your finances effectively.
Frequently Asked Questions
What are Long-Term Capital Assets?
The assets which an assessee sells after the standard holding period of 36 months become long-term capital assets (LTCA). These assets allow an individual to earn long-term capital gains. However, the standard holding period of these assets can vary. In some cases, assets sold after holding for 12 months also become LTCA.
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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