How to take benefits of Capital Gain Exemptions in Income Tax?
Any profit and gain arising from transfer of a capital asset shall be chargeable under the head capital gain in the Previous Year in which transfer took place. The capital gains arising from transfer of capital assets may attract tax under the income tax act. In order to save the tax on capital gains the government has provided some exemptions. Hence if the assesse wants to save tax by availing the exemption then has to follow the measures provided in such exemption. In capital gain exemption the assesse has to purchase the specified asset mentioned in the provision and hold such asset for a particular period. In case the assesse transfers the assets purchased under the exemption scheme than the assesse will be liable to pay tax along with interest if he transfers such capital assets. In this article we will discuss about the various exemption under the income tax act.
Section 54: Capital gain on sale of residential property
Eligibility: Section 54 states that where assesse being individual or HUF has sold a long term capital asset consisting of residential house property then he shall be eligible for exemption of capital gain under this provision.
New asset to be purchased: The assesse is required to purchase one residential house property in India in order to avail exemption under section 54. Where the Long term capital gain arising out of transfer is up to Rs. 2 crore then assesse can acquire two residential house properties prescribed time limit.This benefit of two house property is available to the assesse only once in lifetime.
Time limit of purchase of new asset: The assesse has to purchase the new property within 1 year before or 2 years after the date of transfer of the old asset. In case the assesse conducts construction of the property then such construction must be completed within 3 years from the date of transfer of asset.
If the assesse is not able to purchase the property before the due date of filing of return than he can deposit the amount of capital gain in Capital gain account scheme in order to avail the exemption.
Amount of exemption: The assesse will get a maximum exemption of the amount of long term capital gain or the cost of new asset whichever is lower.
Holding period of asset and Consequences of transfer of new asset: The assesse has to hold the asset for 3 years. In case the assesse transfer the new asset within 3 years from the date of purchase or construction, then cost of acquisition of new asset reduced by exempted capital gain.
Where the amount deposited in Capital gain account scheme is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.
Section 54B: Capital gain on sale of urban agricultural land and used for another agricultural land
Eligibility: Section 54B states that where assesse being individual or HUF has sold a long term capital asset or short term capital asset consisting of rural agricultural then he shall be eligible for exemption of capital gain under this provision.
New asset to be purchased: The assesse is required to purchase either of urban or rural agricultural land in order to avail exemption under section 54B.
Time limit of purchase of new asset: The assesse has to purchase the new property within 2 years after the date of transfer of the old asset.
If the assesse is not able to purchase the property before the due date of filing of return than he can deposit the amount of capital gain in Capital gain account scheme in order to avail the exemption.
Amount of exemption: The assesse will get a maximum exemption of the amount of Capital gain or the cost of new asset whichever is lower
Holding period of asset and Consequences of transfer of new asset: The assesse has to hold the asset for 3 years. In case the assesse transfer the new asset within 3 years from the date of purchase or construction, then cost of acquisition of new asset will be reduced by exempted capital gain.
Where the amount deposited in Capital gain account scheme is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.
Section 54D: Capital gain on compulsory acquisition of Industrial land and building
Eligibility: Section 54D state that where long term capital asset or short term capital asset consisting of Industrial land and building of any assesse has been acquired through compulsory acquisition by the government then the assesse shall be eligible for exemption of capital gain under this provision.
New asset to be purchased: The assesse is required to purchase new land or building for industrial undertaking in order to avail exemption under section 54D.
Time limit of purchase of new asset: The assesse has to purchase the new property within 3 years from the date of receipt of compensation.
If the assesse is not able to purchase the property before the due date of filing of return than he can deposit the amount of capital gain in Capital gain account scheme in order to avail the exemption.
Amount of exemption: The assesse will get a maximum exemption of the amount of Capital gain or the cost of new asset whichever is lower.
Holding period of asset and Consequences of transfer of new asset: The assesse has to hold the asset for 3 years. In case the assesse transfer the new asset within 3 years from the date of purchase or construction, then cost of acquisition of new asset will be reduced by exempted capital gain.
Where the amount deposited in Capital gain account scheme is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.
Section 54EC: Investment in certain bonds
Eligibility: Section 54EC states that where any assesse has sold a long term capital asset consisting of land or building or both then the assesse shall be eligible for exemption of capital gain under this provision.
New asset to be purchased: The assesse is required to purchase the bonds notified by the government in order to claim the exemption. Till date the following company bonds are notified by government:
a. National Highway Authority of India
b. Rural Electrification Corporation Limited.
c. Power Finance Corporation Pvt Ltd.
d. Indian Railway Finance Corporation Limited.
Time limit of purchase of new asset: The assesse has to purchase the bonds within 6 months from the date of transfer of the old asset.
Amount of exemption: The assesse will get a maximum exemption of the amount of Capital gain or Rs. 50,00,000 whichever is lower.
Holding period of asset and Consequences of transfer of new asset: The assesse has to hold bonds for a maximum period of 5 years. In case the bonds are transferred or converted into money within 5 years from date of acquisition then exempt Long term capital gain will be taxable in the year of transfer or conversion.
Section 54F: Capital gain on sale of long term capital asset not to be charged in case of investment in residential house property.
Eligibility: Section 54F states that where assesse being individual or HUF has sold any long term capital asset then he shall be eligible for exemption of capital gain under this provision.
New asset to be purchased: The assesse is required to purchase one residential house property in India in order to avail exemption under section 54F.
Time limit of purchase of new asset: The assesse has to purchase the new property within 1 year before or 2 years after the date of transfer of the old asset. In case the assesse conducts construction of the property then such construction must be completed within 3 years from the date of transfer of asset.
If the assesse is not able to purchase the property before the due date of filing of return than he can deposit the amount of capital gain in Capital gain account scheme in order to avail the exemption.
Amount of exemption: The assesse will get a maximum exemption of the following amount:
Cost of new asset X (Capital Gains/ Net Consideration)
Holding period of asset and Consequences of transfer of new asset: The assesse has to hold the asset for 3 years. In case the assesse transfer the new asset within 3 years from the date of purchase or construction, then exempt Long term capital gain will be taxable in the year of transfer or conversion.
Where the amount deposited in Capital gain account scheme is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.
Other points:
a. On the date of transfer of Long term capital asset, assesse should not own more than one residential house.
b. The assesse should not purchase any residential house within prescribed time limit other than the new asset.
c. If above conditions not satisfied then exempt capital gain taxable in previous year in which such other residential house is purchased/ constructed.
Section 54G: Shifting of undertaking to rural area
Eligibility: Section 54G states that where any assesse has sold long term or short term capital asset consisting of plant and machinery at the time of shifting of industrial undertaking from urban area to rural area then the assesse shall be eligible for exemption of capital gain under this provision.
New asset to be purchased: The assesse has to purchase or construct new plant and machinery, land or building in such rural area or shift original assets to in such rural area or incur expenses in order to avail exemption in this section.
Time limit of purchase of new asset: The assesse has to purchase the new asset within 1 year before or 2 years after the date of transfer of the old asset. In case the assesse conducts construction of the asset then such construction must be completed within 3 years from the date of transfer of asset.
If the assesse is not able to purchase the property before the due date of filing of return than he can deposit the amount of capital gain in Capital gain account scheme in order to avail the exemption.
Amount of exemption: The assesse will get a maximum exemption of the amount of Capital gain or the cost of new asset whichever is lower.
Holding period of asset and Consequences of transfer of new asset: The assesse has to hold the asset for 3 years. In case the assesse transfer the new asset within 3 years from the date of purchase or construction, then cost of acquisition of new asset will be reduced by exempted capital gain.
Where the amount deposited in Capital gain account scheme is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.
Section 54GA: Shifting of undertaking to SEZ
Eligibility: Section 54GA states that where any assesse has sold long term or short term capital asset consisting of plant and machinery at the time of shifting of industrial undertaking from urban area to SEZ area then the assesse shall be eligible for exemption of capital gain under this provision.
New asset to be purchased: The assesse has to purchase or construct new plant and machinery, land or building in such SEZ or shift original assets to in such SEZ or incur expenses in order to avail exemption in this section.
Time limit of purchase of new asset: The assesse has to purchase the new asset within 1 year before or 2 years after the date of transfer of the old asset. In case the assesse conducts construction of the asset then such construction must be completed within 3 years from the date of transfer of asset.
If the assesse is not able to purchase the property before the due date of filing of return than he can deposit the amount of capital gain in Capital gain account scheme in order to avail the exemption.
Amount of exemption: The assesse will get a maximum exemption of the amount of Capital gain or the cost of new asset whichever is lower.
Holding period of asset and Consequences of transfer of new asset: The assesse has to hold the asset for 3 years. In case the assesse transfer the new asset within 3 years from the date of purchase or construction, then cost of acquisition of new asset will be reduced by exempted capital gain.
Where the amount deposited in Capital gain account scheme is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.
Section 54GB: Transfer of residential property or plot of land
Eligibility: Section 54 states that where assesse being individual or HUF has sold a long term capital asset consisting of residential house property then he shall be eligible for exemption of capital gain under this provision.
New asset to be purchased: The assesse has to subscribe to equity shares of eligible company. Eligible company means:
1. Newly incorporated company
2. Company Engaged in the business of manufacture or eligible business
3. Company in which the assesse has >50% share / voting rights
4. Small or Medium enterprise under MSMEA, 2006 or is an eligible startup
Time limit of purchase of new asset: The assesse should purchase/ subscribe the eligible shares up to the date of filing of return.
Where the amount deposited in Capital gain account scheme is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.
Amount of exemption: The assesse will get a maximum exemption of the following amount:
Cost of new plant and machinery X (Capital Gains/ Net Consideration)
Holding period of asset and Consequences of transfer of new asset: If new asset is sold within 5 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon. Eligible company must utilize subscription money for the purchase of new plant and machinery subject to certain conditions within 1 year. If not, such unutilized amount shall be chargeable to tax as capital gains.
Where the amount deposited in Capital gain account scheme is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.
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