Section 54GB of Income Tax Act : Capital Gain Exemption on sale of residential property

A taxpayer can claim a capital gain exemption under Section 54GB of the Income Tax Act to reduce Capital Gains Tax on the sale of a residential property (long-term capital asset). Section 54GB exemption is available on the sale of a residential property i.e. house or plot of land which is a long-term capital asset if the taxpayer invests the sale consideration for subscription in equity shares of an eligible company. The amount of exemption under Section 54GB will be as below:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains

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

A taxpayer can claim an exemption under Section 54F if he/she fulfills all the below conditions:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption is not available to the company, LLP, or Firm.
  2. The asset sold is a Long Term Capital Asset (LTCA). LTCA should be a residential property i.e. house or plot of land.
  3. Taxpayer uses the net consideration for subscription in equity shares of an eligible company.
  4. The taxpayer uses the net consideration for subscription before the due date of filing the Income Tax Return u/s 139(1).
  5. The eligible company should utilise the funds for purchase of new assets within 1 year from the date of subscription.

Taxpayer can claim the capital gain exemption under Section 54GB while filing ITR in 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.

Meaning of Terms – Eligible Company and New Asset

Eligible Company

The company that satisfies the following conditions is an ‘eligible company’ as per Section 54GB. 1st April 2017 onwards, the definition of an eligible company also includes an eligible start-up.

  • The company is incorporated in India.
  • Company is incorporated during the previous year in which the taxpayer earns capital gain upto the subsequent financial year up to the due date of furnishing of ITR.
  • Company is into the business of manufacturing an article or a thing.
  • The taxpayer has more than 50% share capital or more than 50% voting rights after he/she invests into the subscription of equity shares of the company.
  • The company is a medium or small enterprise under the Micro, Small and Medium Enterprises Act, 2006 or it is an eligible start-up.

New Asset

Net Asset means new plant and machinery. However, it does not include the following:

  • Plant or machinery installed in any office premises or any residential accommodation.
  • Plant or machinery which has been previously used by any other person within or outside India.
  • Any vehicle or office appliances including computer or computer software. In the case of an eligible startup, the new asset shall include computers or computer software.
  • Plant or machinery where the actual cost is allowed as a deduction in computing the income under PGBP.

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

As mentioned above, the amount of exemption under Section 54GB will be available as per the following formula:

Exemption = Cost of new asset x Capital Gains / Net Consideration

Maximum Exemption is up to Capital Gains.

Example: Ajay sold residential property in FY 2021-22 for Rs. 70,00,000. It was purchased in FY 2016-17 for Rs. 20,00,000. And Ajay invested into equity shares of eligible company for Rs. 55,00,000 in FY 2021-22. Ajay will be able to claim a deduction under Section 54GB as follows:

Particulars Amount
Sales Consideration 70,00,000
Less: Index Cost of Acquisition (20,00,000*317/264) (24,01,515)
Long Term Capital Gains 45,98,485
New House Property Purchase Price 55,00,000
Section 54F Exemption Amount (35,00,000*7,77,500/15,00,000) = 18,14,167 or 7,77,500 45,98,485
Refer Index Cost from here.
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54GB of the Income Tax Act.
Tip
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54GB of the Income Tax Act.

What happens to Section 54GB exemption if taxpayer sells the equity shares?

The lock-in period of 5 years is applicable when the taxpayer claims exemption under Section 54GB of income tax act. And the following situations can arise:

Situation 1: Sale of shares and new assets before 5 years

When the taxpayer sells the equity shares or the company sells the new assets within 5 years from the date of acquisition.

Consequences: The exemption under Section 54GB is withdrawn. And the amount of exemption availed will be taxable in the previous year in which the taxpayer sells the equity shares or the company sells the new assets.

Situation 2: Sale of shares and new assets after 5 years

When the taxpayer sells the equity shares or the company sells the new assets within 5 years from the date of acquisition.

Consequences: The exemption under Section 54GB is not withdrawn. The taxpayer will be able to claim the index cost of acquisition while calculating capital gains tax on sale of equity shares. And capital gains will be taxable at 20%.

File Your ITR for
Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

File Your ITR for

Capital Gains

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

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

Under Section 54GB, 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 to invest in the equity shares of an eligible company till the due date of submission of ITR, then he/she should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim exemption of the amount already spent on the purchase of equity shares 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 1 year, then it shall be taxable as income of the last year.

FAQs

What is Net Consideration under Section 54GB?

Net Consideration is the full sales value or consideration received on the sale of residential property reduced by any expense incurred in connection with the transfer.
Net Consideration = Sales Value – Transfer Expenses

What will be the tax rate on capital gains earned if the taxpayer does not claim an exemption under Section 54GB?

Capital Gains on Sale of Residential Property being a Long Term Capital Asset LTCA is taxed at the rate of 20% with the benefit of Indexation. The taxpayer has an option to claim an exemption under Section 54GB by investing in equity shares of an eligible company.

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.

Continue the conversation on TaxQ&A

5 more replies

Participants