Section 54D of the Income Tax Act offers tax relief to taxpayers who receive capital gains from the compulsory acquisition of land or buildings used for business or industrial purposes. This section allows taxpayers to defer or avoid capital gains tax by reinvesting the compensation into new assets. The primary objective of Section 54D is to provide relief to businesses that are displaced due to compulsory acquisition by the government or other authorities, enabling them to reestablish without the additional tax burden on the compensation received.
Capital Gains investment under Section 54D
When the government acquires rights in land through compulsory acquisition, the owner of such land is liable to pay tax on capital gains. Section 54D of the Income Tax Act grants an exemption for capital gains arising from the compulsory acquisition of land or buildings that are part of an industrial undertaking. Thus, a taxpayer can claim a capital gain exemption on income from compulsory acquisition if they invest such funds into land or building for shifting or reestablishing such industrial undertaking.
Eligibility to claim an exemption under Section 54D
A taxpayer can claim a capital gain exemption on the compulsory acquisition of land or building forming part of an industrial undertaking under Section 54D if they satisfy all the below conditions:
- Any taxpayer i.e. Individual, HUF, Company, LLP, Firm, etc can claim an exemption under Section 54D of the Income Tax Act.
- The taxpayer has received compensation for the compulsory acquisition of land or building or any right in land or building forming part of an industrial undertaking.
- The taxpayer had used the land or building for industrial purposes for at least 2 years immediately before the compulsory acquisition.
- The taxpayer must purchase any other land or building or any right in land or building or construct any building for shifting or re-establishing the existing undertaking or setting up a new industrial undertaking within 3 years from the date of transfer.
The taxpayer can claim the Capital Gains Exemption under Section 54D while filing an ITR for that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.
Quantum of exemption under Section 54D
The amount of exemption under Section 54D will be lower of the following:
- Cost of new asset i.e. new land or building of industrial undertaking,
- Capital Gains on the compulsory acquisition of old land or building of industrial undertaking
Example: Akash purchased land for industrial undertaking in June 2004 for INR 3,50,000. The State government compulsorily acquired the property at a compensation of INR 13,00,000 in January 2024. Akash purchased another land for its industrial undertaking at INR 2,00,000 in March 2024. The amount of exemption under Section 54D will be:
| Particulars | Amount |
| Sale Proceeds | 13,00,000 |
| Less: Indexed cost of Acquisition (3,50,000 * 348/113) | (10,77,876) |
| Capital Gains | 2,22,124 |
| Cost of Acquisition of New Asset | 2,00,000 |
| Capital Gain exemption under Section 54D | 2,00,000 |
Consequences of Transfer of New Industrial Undertaking
The lock-in period of 3 years is applicable. The following situations can arise:
Situation 1: Sale of new industrial undertaking before 3 years
When the taxpayer sells the new residential house within 3 years from the date of purchase or construction and the cost of the new house purchased is less than Capital Gains.
Consequences: They withdraw the exemption under Section 54D. The total sales value of the new house property will be taxable as capital gains. Here the cost of acquisition will be NIL.
Situation 2: Sale of new industrial undertaking before 3 years
When the taxpayer sells the new residential house within 3 years from the date of purchase or construction the cost of the new house purchased is more than Capital Gains.
Consequences: They withdraw the exemption under Section 54D. However, the taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54D) while calculating capital gains.
Situation 3: Sale of new industrial undertaking after 3 years
When the taxpayer sells the new residential house after 3 years from the date of purchase or construction.
Consequences: They will not withdraw the exemption under Section 54D.The taxpayer will be able to claim the index cost of acquisition while calculating the capital gain on the sale of a new industrial undertaking. They must pay income tax on capital gains at the rate of 20%.
CGAS Scheme for claiming exemption under Section 54D
Under Section 54D, the taxpayer can take benefit of the CGAS Scheme to claim the exemption. If a taxpayer is unable to utilize the whole or part of the sales consideration for the purchase or construction of a new industrial undertaking till the due date of submission of ITR, they should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim an exemption of the amount already spent on construction or purchase of property along with the amount deposited in CGAS.
However, it is important to note that if the taxpayer is unable to utilise the amount deposited in the Capital Gains Account Scheme within the time limit of 3 years, then it shall be taxable as income of the last year.
FAQs
Yes. The benefit of the CGAS Scheme is available to claim a capital gain exemption under Section 54D. You can park your funds from compensation received on compulsory acquisition in the CGAS Scheme. You must later utilise this money for the purchase or construction of a new industrial undertaking within the time limit of 3 years.
Capital Gains are exempt from tax for compensation received on compulsory acquisition of:
1) Urban agricultural land – exempt from income tax as per Section 10(37) of the Income Tax Act
2) Rural agricultural land – exempt from income tax since it is not a capital asset as per the Income Tax Act
3) Non-agricultural land – exempt from income tax as per the RFCTLARR Act and the CBDT Circular issued in 2016
Yes, the exemption is available even for short-term capital gains. Provided such asset is used by the assessee for the industrial undertaking even if they were not the owner of the property for a complete 2 years.
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.
Got questions? Shoot’em here.