Section 54D of Income Tax Act : Capital Gains Exemption on Compulsory Acquisition

When the government acquires private rights in land through compulsory acquisition, the owner of such land is liable to pay tax on such capital gains income from compulsory acquisition. The income tax department issued Section 54D of Income Tax Act to provide an exemption from Capital Gains Tax on the compulsory acquisition of land or building forming part of an industrial undertaking. Thus, a taxpayer can claim a capital gain exemption on income from compulsory acquisition of land or building that they used for business purpose if they invest such funds into land or building for shifting or reestablishing such industrial undertaking. The amount of capital gain exemption under Section 54EE will be lower of:

  1. The cost of new asset i.e. new land or building of industrial undertaking
  2. The capital gains on the compulsory acquisition of old land or building of industrial undertaking

Who can claim an exemption under Section 54D of Income Tax Act?

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 he/she satisfies all the below conditions:

  1. Any taxpayer i.e. Individual, HUF, Company, LLP, Firm, etc can claim an exemption under Section 54D of Income Tax Act.
  2. The taxpayer has received compensation for the compulsory acquisition of land or building or any right in land or building.
  3. The taxpayer had used the land or building for industrial purpose for at least 2 years before the compulsory acquisition.
  4. Taxpayer invests Capital Gains within 3 years from the date of receipt of compensation.
  5. Taxpayer invests in land or building for shifting or re-establishing the industrial undertaking.

The taxpayer can claim the Capital Gains Exemption under Section 54D while filing 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.

What is the amount of exemption available under Section 54D of Income Tax Act?

As mentioned above, 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: Ravi sold a house property in FY 2021-22 for Rs. 60,00,000. He purchased the property in FY 2016-17 for Rs. 30,00,000. And he purchased a new house property worth Rs. 45,00,000 in another city. Ravi will be able to claim a deduction under section 54 as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*317/264) (36,02,272)
Long Term Capital Gains 23,97,728
New House Property Purchase Price 45,00,000
Section 54 Exemption Amount 23,97,728
Refer Index Cost from here.
Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
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Index Cost Calculator
You can calculate the Index Cost of acquisition of property from here.
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What happens to Section 54D exemption if the taxpayer sells the new industrial undertaking?

The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54D of income tax act. And 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: The exemption under Section 54D is withdrawn. And the total sales value of 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 and the cost of the new house purchased is more than Capital Gains.

Consequences: The exemption under Section 54D is withdrawn. 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: The exemption under Section 54D is not withdrawn. The taxpayer will be able to claim the index cost of acquisition while calculating the capital gain on sale of new industrial undertaking. He/she must pay income tax on capital gains at the rate of 20%.

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CGAS Scheme for claiming exemption under Section 54D of Income Tax Act

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, he/she should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim exemption of 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

Can I invest in Capital Gains Account Scheme (CGAS) and claim an exemption under Section 54D?

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.

Can I claim 54D exemption for compensation received on compulsory acquisition of agricultural land?

Rural agricultural land is not a capital asset as per Income Tax Act and thus the transfer of rural agricultural land is not taxable. Further, capital gains on compensation received on compulsory acquisition of urban agricultural land are exempt from tax under Section 10(37) of the Income Tax Act. Thus, compensation received for compulsory acquisition of agricultural land (rural or urban) is exempt from income tax.

My land was taken away under compulsory acquisition for road widening in return for compensation. Is this taxable?

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 Income Tax Act
2) Rural agricultural land – exempt from income tax since it is not a capital asset as per Income Tax Act
3) Non-agricultural land – exempt from income tax as per the RFCTLARR Act and the CBDT Circular issued in 2016

Got Questions? Ask Away!

  1. Hey @TanyaChopra

    To claim Capital Gains Exemption under Section 54EC, you need to file ITR-2.

    Read more about Section 54EC here

  2. Details are as follow:

    • Commercial Plot is purchased through joint names (father and me), construction cost paid through cash.
    • Plot booked in 2019, Sale process started in 2022 [about 35% received via biana within a week ago, remaining 65% payment to be received within 2 months as per mutual agreement]
    • Plot’s Basic Sale Price = Rs. 33L; however, overall including EDC and Delayed Interest, up to Rs. 34L
    • Sale amount = Rs. 50L
    • I do not own any house, live under mother’s rental lease agreement, currently.
    • I’m a salaried employee under private company.

    My queries/confusion:

    1. Cost Inflation Index FY based on possession date (not booking date) as entry date and sale transferred (not biana date) as exit date, right?

    2. 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?

    3. 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

    4. 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?

    5. If yes, can I keep 18.1L in my bank account or invest in FD / MF? Any further suggestion?

  3. Hey @learner

    1. 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.

    2. 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

    3. 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

    4. 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

    1. With the remaining sale proceeds, if you keep them in bank account, you will earn Savings Interest, if you invest in FD, you will earn FD Interest, You can look for other investment options where you earn income and also gain tax benefit such as ELSS, PPF, NSC, etc. Read more about it here
  4. Thanks a lot @Sakshi_Shah1 for the detailed answer and @Amulya_Garg for ensuring my queries addressed.

    I do have a follow-up queries.

    1. 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.

    2. 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)?

  5. Hello @learner

    1. 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.

    2. Capital Gains on sale of commercial plot can be exempt if the taxpayer invests in any of the following assets:

    • Section 54EC - Buying bonds of NHAI, REC, etc
    • Section 54EE - Buying units of fund notified by Central Government to finance start-ups
    • Section 54F - Buying residential house property
  6. 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.

  7. 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.

  8. 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:

    1. Any assessee i.e. Individual, HUF, Company, LLP, Firm, etc can claim an exemption under Section 54EE.
    2. The asset sold is any Long Term Capital Asset (LTCA).
    3. The taxpayer invests Capital Gains within 6 months from the date of transfer of the original asset.
    4. Taxpayer invests in units of funds notified by the Central Government on or before 1st April 2019 to finance startups.
    5. The investment amount can not be more than INR 50 lakhs during any financial year.
    6. The investment amount can not be more than INR 50 lakhs during the current and succeeding financial year.

    You can read more about Section 54EE here.

    Got questions? Shoot’em here.

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