When individuals sell their assets, they are required to pay capital gains tax on the profits earned. The tax rates differ based on the duration for which the assets were held, either as short-term or long-term. To provide tax relief and to encourage investment in assets with potential long-term appreciation, the Income Tax Act provides specific exemption options. These Capital Gain Exemptions, as outlined under section 54, allow taxpayers to reduce their tax liability when filing their Income Tax Returns, and provide them with opportunities to benefit from tax savings.
What is Capital Gain Exemption?
The Income Tax Department provides capital gain tax exemptions to taxpayers through section 54. This section allows taxpayers to potentially avoid paying taxes on profits earned from the sale of certain assets if they reinvest in eligible assets. The section lists various assets that are eligible for reinvestment. Hence, if a taxpayer invests in these assets within the given timeframe, they can claim either partial or complete exemption on their capital gains. However, it is essential to note that these exemptions cannot exceed the total capital gains amount.
List of Capital Gain Exemption
| Section | Description | Applicability | Deduction Amount |
| 54 | Long-Term Capital Gains on Sale of Residential House Property by Individual/HUF | – Purchase or Construction of Residential House Property – Purchased 1 year before or 2 years after the sale of a property – Constructed within 3 years of the sale of a property | Lower of Cost of New House Property OR Capital Gains |
| 54F | Sale of Long Term Capital Asset (LTCA) other than house property by Individual/HUF | – Purchase/Construction of New House Property – Purchased 1 year before or 2 years after the sale of a property – Constructed within 3 years of the sale of a property | Cost of new asset * Capital Gains / Net Consideration |
| 54EC | Sale of long-term Land or Building or both by any taxpayer | – Investment in NHAI/REC Bonds – An investment made within 6 months of the sale of an asset – The investment amount can not be more than Rs. 50 lakhs | Lower of Cost of Investment OR Capital Gains |
| 54B | Sale of long-term or short-term Agricultural Land by Individual/HUF | – Purchase of new Agricultural Land – Purchased within 2 years from the sale of land – Land sold must be used for agriculture purposes for 2 years before sale | Lower of Cost of New Agricultural Land OR Capital Gains |
| 54D | Compulsory acquisition of long-term land and buildings used in an industrial undertaking | – Purchase of land or building for shifting or re-establishing the industrial undertaking – Purchase within 3 years from the date of receipt of compensation – Land/Building acquired must be used for industrial undertaking purposes for 2 years before the transfer | Lower of Cost of New Asset OR Capital Gains |
| 54E, 54EA, 54EB | Sale of any long-term capital asset by any taxpayer | – Investment in Specified Securities – Specified securities include Government Securities, Savings Certificates, Units of UTI, Specified Debentures, etc – An investment made within 6 months of the sale of an asset | Cost of new asset * Capital Gains / Net Consideration |
| 54EE | Sale of any long-term capital asset by any taxpayer | – Investment in units of a notified fund to finance startups – The investment amount can not be more than Rs. 50 lakhs – An investment made within 6 months of the sale of an asset | Lower of Cost of Investment OR Capital Gains |
| 54G | Sale of plant, machinery, land, and buildings to shift industrial undertaking from urban area to rural area | – Purchase of new plant, machinery, land, building to shift industrial undertaking to rural area – Purchased within 1 year before and 3 years after the sale of assets – The asset sold can be LTCA or STCA | Lower of Cost of New Asset OR Capital Gains |
| 54GA | Sale of plant, machinery, land, and buildings to shift industrial undertaking from urban area to rural area | – Purchase of new plant, machinery, land, and building to shift industrial undertaking to SEZ – Purchased within 1 year before and 3 years after the sale of assets – The asset sold can be LTCA or STCA | Lower of Cost of New Asset OR Capital Gains |
| 54GB | Sale of long-term residential house property or residential plot of land by individual or HUF | – Subscription in equity shares of eligible company or startup – Eligible companies or startups should utilize the amount of subscription for the purchase of new assets | Cost of new asset * Capital Gains / Net Consideration |
Key features to keep in mind while claiming an exemption
- Section 54F
- On the date of transfer of LTCA, the taxpayer should not own more than one residential house
- They should not purchase any other house within 2 years or construct within 3 years after the date of transfer
- If the above conditions are not satisfied then exempt CG will be taxable in a year in which such other residential house is purchased or constructed
- Section 54EC
- If the taxpayer takes any loan or advance on the security of bonds/units, they shall be deemed to have converted into money on the date on which such loan or advance is taken and capital gain exempted earlier shall be taxable.
- If the taxpayer takes any loan or advance on the security of bonds/units, they shall be deemed to have converted into money on the date on which such loan or advance is taken and capital gain exempted earlier shall be taxable.
- If LTCG is up to 2 crores then the taxpayer can acquire 2 residential house properties in the given time limit. However, this benefit of 2-house properties is available only once in a lifetime.
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Capital Gains Account Scheme
The Capital Gains Account Scheme (CGAS) allows taxpayers to hold funds temporarily to claim capital gain exemptions. By opening a CGAS account, taxpayers can reduce their capital gains tax by investing in specified assets. If unable to invest before the ITR filing deadline, they must deposit funds into a CGAS account to qualify for exemption. This scheme applies to various sections such as Sections 54, 54B, 54D, 54EE, 54F, 54G, 54GA, and 54GB.
How to report Exemption in ITR?
When filing an ITR, taxpayers must provide details of their investments in specific sections to claim capital gain exemptions. If the taxpayer has temporarily deposited the amount of the gain in a CGAS, they also need to include these details in ITR.
Here are the steps to disclose the capital gain exemption while filing an ITR
- Navigate to the Schedule Capital Gains
Under this schedule, select the appropriate income sources. Then on the next screen click on Add Details under option D – Information about Deductions Claimed Against Capital Gains.
- Add the Section of deduction claimed
On clicking add details, there will be a drop-down menu for selecting the section of capital gain deduction. Under this, the taxpayer has to select the appropriate section under which they are claiming the deduction.
- Enter the details of the amount invested
Once the section is selected, the taxpayer needs to enter the required details of the investment.
For example, if the taxpayer has invested long-term gains of any asset in residential property, then it will be reported u/s 54F.
FAQs
Taxpayers can claim exemption u/s 54, 54F depending on the asset sold. An exemption can be claimed by depositing the amount in the CGAS. They can claim an exemption by depositing the amount in the CGAS. However, they must deposit it before the due date of filing their ITR. And claim the same as an exemption while filing an ITR.
The taxpayer can claim exemption u/s 54B and 54G on Short Term Capital Asset. However, all the other exemptions are available on Lond Term Capital Asset.
While filing an ITR, the taxpayer only needs to enter the exemption section, the purchase date, and the value. However, it is important to keep the purchased assets documents on record for future use.
Hey @TanyaChopra
To claim Capital Gains Exemption under Section 54EC, you need to file ITR-2.
Read more about Section 54EC here
Details are as follow:
My queries/confusion:
Cost Inflation Index FY based on possession date (not booking date) as entry date and sale transferred (not biana date) as exit date, right?
Since it is a jointly held, I did not pay anything to acquire the commercial plot but father did. Now when we sell, 50% will be to each account, what would be my LTCG?
Please correct me if I’m missing something for my LTCG (>24 mo.):
(+) Sale Consideration: Rs. 25L (half of 50L overall joint)
(-) Transfer Expenses: Rs. 0 (constructed via cash not eligible, right?)
(-) Indexed Cost of Acquisition: 16.5L * 317/289 = 18.1L
(-) Indexed Cost of Improvement: ?? (what exactly is this?)
Long-Term Capital Gain: 6.9L
If possession date and sale date is 24+ months , can I save LTCG tax by just investing Rs. 6.9L in IRFC/NHAI/PFC/IRFC bond under Section 54EC?
If yes, can I keep 18.1L in my bank account or invest in FD / MF? Any further suggestion?
@Sakshi_Shah1 can you help ?
Hey @learner
Indexed Cost of Acquisition is calculated as Cost of Acquisition * CII for Sale Year/ CII for Purchase Year. In your case, CII for Sale Year would be CII of the year in which you sold property. CII for Purchase Year would be CII of the year in which you got the possession of property.
If you have not contributed towards the purchase consideration, you will not be treated as a co-owner for income tax purpose. Thus, the entire LTCG would be taxed in the ITR of your father as Sale Value - Transfer Expenses - Indexed Cost of Acquisition
Cost of Improvement is a capital expenditure incurred by an assessee for making improvement in the property. It can be claimed as a deduction for computing capital gains. Indexed Cost of Improvement is calculated as Cost of Improvement * CII of year of sale / CII of year of improvement
If the period of holding is more than 24 months, income is treated as LTCG. You can claim exemption under Section 54EC if you fulfill all the conditions as per the Section. Read more about it here
Thanks a lot @Sakshi_Shah1 for the detailed answer and @Amulya_Garg for ensuring my queries addressed.
I do have a follow-up queries.
Since the tax is under hand of my father as he only purchased the commercial plot, can I enjoy 50% of sale proceeds that is credited to my bank account without any tax? “Enjoy” in my term refer to Multi-Option-Deposit (Bank) with quarterly payout.
My father has purchased another commercial plot, do you have any relevant article that explains how tax can be saved by utilizing the sale proceeds to buy another commercial plot (before or after)?
Hello @learner
Ideally, since your father is the owner of the property, the sale proceeds should be credited to his bank account. If the money has already been credited to your account, there are chances that the Assessing Officer i.e. AO might question the source of funds and a justification why they are not reported as income in the ITR.
Capital Gains on sale of commercial plot can be exempt if the taxpayer invests in any of the following assets:
The registration of commercial property comes under both father and my name (co-owners), which is how sale proceeds is credited to each of us, however, all the payments for purchase of property were done by father only. And my father will report the whole capital gains in his account.
Will this below stands true in my ITR if I do not report?
And thanks for 2nd point.
@Sakshi_Shah1 can you help?
Hey @learner
Your father should report the capital gains in his ITR. You need not report the same in your ITR. However, you must hold relevant proofs of the capital gains taxed in your father’s ITR in case the AO questions source of funds in your account.
The income tax department introduced a new Section 54EE of Income Tax Act with effect from 1st April 2017. Section 54EE provides for exemption from Capital Gains Tax on the sale of any long-term capital asset by investing into units of specified funds.
A taxpayer can claim an exemption u/s 54EE if they fulfill all the below conditions:
You can read more about Section 54EE here.
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