Section 54EE of Income Tax Act : Capital Gains Exemption on Investment in units of Specified Fund

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. The amount of capital gain exemption under Section 54EE will be lower of:

  1. The cost of new asset i.e. units of specified fund
  2. The capital gains on the sale of long term capital asset

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

A taxpayer can claim an exemption u/s 54EE if he/she fulfills 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.

The taxpayer can claim the Capital Gains Exemption under Section 54EE 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 54EE of Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54EE of the Income Tax Act will be the least of the following:

  1. The investment amount in new assets i.e. units of specified fund
  2. The capital gains on the sale of long term capital asset
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Example: Arjun sold commercial property in FY 2021-22 for Rs. 60,00,000. It was purchased in FY 2016-17 for Rs. 30,00,000. He purchased units of specified funds INR. 45,00,000 in FY 2021-22. Arjun will be able to claim deduction under section 54EE 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
Cost of Specified Investment 45,00,000
Section 54EE Exemption Amount 23,97,728
Refer Index Cost 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 exemption if taxpayer sells the 54EE specified investment?

The lock-in period of 3 years is applicable when the taxpayer claims an exemption under Section 54EE of Income Tax Act. And the following situations can arise:

Situation 1: Sale of specified investment before 3 years

When the taxpayer sells the specified investment within 3 years from the date of purchase.

Consequences: The exemption under Section 54EE is withdrawn. The amount of exemption that the taxpayer avails will be reduced from the cost of the asset. Thus, Capital Gains will be the total sales value minus the cost of the asset.

If the taxpayer takes a loan or advance on the security of the specified investment, the asset is deemed to have been sold on the date of such loan or advance. Thus, the exemption under Section 54EE would be withdrawn if such loan or advance is taken within 3 years from the date of purchase.

Situation 2: Sale of specified investment after 3 years

When the taxpayer sells the specified investment after 3 years from the date of purchase.

Consequences: The exemption under Section 54EE is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains on the investment sold.

FAQs

What are Long Term Specified Assets under Section 54EE?

As per Section 54EE, long term specified asset means units issued before 1st April 2019, of a fund notified by the Central Government. If an investor selling long term capital asset, invests into these units, he can claim exemption from capital gains tax.

Which funds are notified as Long Term Specified Assets under Section 54EE?

Section 54EE was introduced in Budget 2016. The taxpayer can save tax on capital gains on investment in long term specified asset i.e. units of a fund notified by the government. However, the government did not notify any eligible investment and as a result no taxpayer could take benefit of this capital gain exemption.

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

No. The benefit of investing in CGAS is not available under Section 54EE. The taxpayer needs to invest in a specified investment within 6 months of the date of transfer of the long-term capital asset.

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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