Capital Gain Exemption

Capital Gain Tax arises on the sale of Capital Asset by a taxpayer. The Income Tax Act allows a total / partial exemption from Capital Gain under different sections. However, the capital gain exemption amount can not exceed the total amount of capital gain. Following are the most common capital gains exemptions:

A taxpayer can claim the exemption while filing ITR for that particular financial year. An individual taxpayer needs to file ITR 2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 30th November 2020.

ITR for Gains from Sale of House / Property
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List of Capital Gain Exemption

The Income Tax Act has defined the particular sections under which exemptions can be claimed on capital gains earned. The intention of the exemption is to allow the taxpayer to invest in a new Capital Asset within a specified time limit without any tax burden.

Section Description Applicability Deduction Amount
54 Sale of House Property (LTCA) by Individual/HUF Purchase/Construction of New House Property. Lower of
Cost of New House Property
OR
Capital Gains
Purchased 1 year before or 2 years after the sale of a property.
Constructed within 3 years from the sale of a property.
54F Sale of Long Term Capital Asset (LTCA) other than house property by Individual/HUF Purchase/Construction of New House Property. Cost of new asset * Capital Gains / Net Consideration
Purchased 1 year before or 2 years after the sale of a property.
Constructed within 3 years from the sale of a property.
54EC Sale of Land or Building or both (LTCA) by any taxpayer Investment in NHAI/REC Bonds.  Lower of
Cost of Investment 
OR
Capital Gains
An investment made within 6 months from the sale of an asset. 
The investment amount can not be more than Rs. 50 lakhs. 
54B Sale of Agricultural Land (LTCA/STCA) by Individual/HUF Purchase of new Agricultural Land.  Lower of
Cost of New Agricultural Land 
OR
Capital Gains
Purchased within 2 years from the sale of land. 
Land sold must be used for agriculture purposes for 2 years prior to sale. 
54D Compulsory acquisition of land and building (LTCA) used in an industrial undertaking Purchase of land or building for shifting or re-establishing the industrial undertaking.  Lower of
Cost of New Asset
OR
Capital Gains
Purchase within 3 years from the date of compulsory acquisition. 
Land/Building acquired must be used for industrial undertaking purposes for 2 years prior to transfer. 
54E, 54EA, 54EB Sale of any LTCA by any taxpayer Investment in Specified Securities.  Cost of new asset * Capital Gains / Net Consideration
Specified securities include Government Securities, Savings Certificates, Units of UTI,  Specified Debentures, etc. 
An investment made within 6 months from the sale of an asset. 
54EE Sale of any LTCA by any taxpayer Investment in units of a specified fund. The investment amount can not be more than Rs. 50 lakhs.  Cost of new asset * Capital Gains / Net Consideration
Specified fund include units notified by the central government 
An investment made within 6 months from the sale of an asset.
54G Sale of plant, machinery, land,  building, or rights to land, building situated in an Urban Area used in the industrial undertaking.   Purchase of new plant, machinery, land, building in Rural Area.  Lower of
Cost of New Asset
OR
Capital Gains
Purchased within 1 year before and 3 years after the sale of assets. 
The asset sold can be LTCA or STCA. 
54GA Sale of plant, machinery, land,  building, or rights to land, building situated in an Urban Area used in the industrial undertaking.   Purchase of new plant, machinery, land, building in SEZ.  Lower of
Cost of New Asset
OR
Capital Gains
Purchased within 1 year before and 3 years after the sale of assets. 
The asset sold can be LTCA or STCA. 

 

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FAQs

How to claim exemption if we wish to buy the house property next year?

Taxpayer can claim exemption u/s 54, 54F depending on asset sold. An exemption can be claimed by putting the amount in Capital Gains Account Scheme (CGAS) before the due date of filing of ITR in the year of sale. And claim the same as exemption while filing ITR.

Can we claim exemptions on sale of Short Term Capital Asset(STCA)?

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.

What are the documents required as proof of investment while claiming exemption?

While filing ITR, taxpayer only needs to enter the exemption section, required details of purchased asset and amount of exemption claimed. However, it is important to keep the purchased assets documents on record for future use.

Section 54B : Exemption on Sale of Agricultural Land

Exemption under section 54B of the Income Tax Act is available on Capital Gains on sale of agricultural land and purchase of new agricultural land. The amount of Exemption under Section 54B will be lower of:

  1. The Cost of new Agricultural land,
  2. The Capital Gains on the sale of Agricultural land.

A taxpayer can claim the Capital Gains Exemption under Section 54B exemption while filing ITR for that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 10th January 2021.

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Who can Claim an Exemption Under Section 54B of the Income Tax Act?

A taxpayer can claim exemption u/s 54B if all the below conditions are satisfied:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption u/s 54 is not available to the company, LLP, or Firm.
  2. The agricultural land sold is a Long Term Capital Asset (Sold after 24 months) or Short Term Capital Asset.
  3. The agricultural land sold is used for agricultural purposes by the individual / his parent / HUF as the case may be for 2 years prior to transfer.
  4. New Agricultural land is purchased within 2 years from the sale of the agricultural land.
  5. A new Agricultural land should be in India.
In case of compulsory acquisition the
period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.
Tip
In case of compulsory acquisition the
period of acquisition of new agricultural land will be determined from the date of receipt of compensation and not the date of compulsory acquisition.

What is the Amount of Exemption available Under Section 54B of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54B will be least of the following:

  1. The Cost of new Agricultural land,
  2. The Capital Gains on the sale of Agricultural land.

Example: Palak sold agricultural land in FY 2019-20 for Rs. 60,00,000. The same was purchased in FY 2013-14 for Rs. 30,00,000. And she purchased a new agricultural land worth Rs. 45,00,000. Palak will be able to claim deduction under section 54B as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*289/220) (39,40,909)
Long Term Capital Gains 20,59,091
New House Property Purchase Price 45,00,000
Section 54B Exemption Amount 20,59,091
Refer Index Cost from here.
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What Happens to Exemption in the case of sale of Agricultural Land?

The lock-in period of 3 years is applicable when exemption u/s 54B of the income tax act is claimed. And the following situations can arise:

Situation 1

When new agricultural land is sold within 3 years from the date of purchase and the cost of a new house purchased is less than Capital Gains.

Consequences: The exemption u/s 54B is withdrawn. And the total sales value of agricultural land will be taxable as capital gains. Here the cost of acquisition will be NIL.

Situation 2

When new agricultural land is sold within 3 years from the date of purchase and the cost of a new house purchased is more than Capital Gains.

Consequences: The exemption u/s 54B is withdrawn. However, a taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54B) while calculating capital gains.

Situation 3

When new agricultural land is sold after 3 years from the date of purchase/construction.

Consequences: The exemption u/s 54B is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Long Term Capital Gains on agricultural land sold.

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What is the Capital Gains Account Scheme (CGAS)?

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase/construction of new property till the due date of submission of ITR, then it should be deposited in the Capital Gains Deposit Account Scheme. Taxpayer can claim exemption of amount already spent on construction/purchase of property along with the amount deposited in CGAS.

Keep in mind, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

FAQs

Can I claim an exemption if I buy new agricultural land in the name of my spouse?

No. In order to claim exemption u/s 54B, the land purchased has to be in the name of the seller. The exemption is not available if new land is purchased in the name of the spouse.

Can NRI claim exemption u/s 54B on land purchased?

Yes, NRI can claim exemption u/s 54B of the Income Tax Act. Provided the agricultural land sold and purchased is situated in India.

Is capital gain exempt in the case of compulsory acquisition of agricultural land by the government?

Yes. Capital gain arising from compulsory acquisition of agricultural land under any law and the consideration of which is approved by the central government or RBI received on or after 01/04/2004 is fully exempt from tax. It is exempt u/s 10(37) of the income tax act.

Section 54EC of the Income Tax Act

Exemption under section 54EC of the Income Tax Act is available on Capital Gains on sale of any long term capital asset being land or building or both and invested in NHAI or REC Bonds. The amount of Exemption under Section 54EC will be lower of:

  1. The Cost of NHAI/REC Bonds,
  2. The Capital Gains on the sale of land or building.

A taxpayer can claim this Capital Gains Exemption while filing ITR in that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 10th January 2021.

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Budget 2018 Update

The proposed amendment u/s 54EC in the budget 2018 has inter alia proposed an amendment to Section 54EC. The government has proposed to amend the section by restricting its scope only to capital gains arising from long term capital assets, being land or building, or both. Furthermore, it is also proposed to provide the long term specified asset, for making any investment under the section on or after the 1st day of April 2018 shall mean any bond, redeemable after five years against the earlier three years and issued on or after 1st day of April 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf.

This amendment is to take effect from the 1st of April 2019. It will apply in relation to the AY 2019-20 and subsequent assessment years.

Who can Claim an Exemption Under Section 54EC of the Income Tax Act?

A taxpayer can claim exemption u/s 54EC if all the below conditions are satisfied:

  1. Any assessee can claim exemption u/s 54EC. Therefore, an Individual, HUF, Company, LLP, Firm, etc can claim this exemption.
  2. The asset sold is a Long Term Capital Asset (LTCA) being Land or Building or Both. The asset is long Term if it has been held for more than 24 months.
  3. Capital Gains are invested within 6 months from the date of transfer.
  4. Investment can be made in the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), or Any Other Bonds notified by the Central Government.
  5. The investment amount can not be more than Rs. 50 lakhs during the current and succeeding financial year.
From FY 2018-19, Investment in NHAI/REC bonds are redeemable after 5 years as against earlier 3 years as per Budget 2018.
Tip
From FY 2018-19, Investment in NHAI/REC bonds are redeemable after 5 years as against earlier 3 years as per Budget 2018.

What is the Amount of Exemption Available Under Section 54EC of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54EC will be least of the following:

  1. The Cost of NHAI/REC Bonds,
  2. The Capital Gains on the sale of land or building.
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Example: Jay sold land in FY 2019-20 for Rs. 60,00,000. It was purchased in FY 2013-14 for Rs. 30,00,000. And Jay purchased NHAI bonds for Rs. 45,00,000 in FY 2019-20. Jay will be able to claim deduction under section 54EC as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*289/220) (39,40,909)
Long Term Capital Gains 20,59,091
NHAI Bonds Price 45,00,000
Section 54EC Exemption Amount 20,59,091
Refer Index Cost from here.
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What happens to exemption if bonds are sold?

The lock-in period of 5 years is applicable when exemption u/s 54EC of the income tax act is claimed. And the following situations can arise:

Situation 1:

When bonds are sold within 5 years from the date of purchase.

Consequences: The exemption u/s 54EC is withdrawn. And the amount of exemption availed will be reduced from the cost of the asset. And Capital Gains will be the total sales value minus the cost of the asset.

Situation 2:

When bonds are sold after 5 years from the date of purchase.

Consequences: The exemption u/s 54EC is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains on bonds sold.

FAQs

Can I invest in Capital Gains Account Scheme (CGAS) and claim exemption u/s 54EC?

No. The Benefit of investing in CGAS is not available under section 54EC. The taxpayer needs to invest in bonds within 6 months of the date of transfer of asset.

Can NRI Claim exemption u/s 54EC?

Yes, NRI can claim exemption u/s 54EC of the Income Tax Act. Provided the land or building sold is situated in India.

What will be the tax rate on capital gains earned if exemption u/s 54EC is not claimed?

LTCA are taxed at special rates. Land and Building are considered as movable assets and taxed at 20% with Indexation.

Section 54F of the Income Tax Act

Exemption under section 54F of the Income Tax Act is available on Capital Gains on sale of any long term capital asset other than house property and invested in purchase/construction of house property. The amount of Exemption under Section 54F will be lower of:

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

Maximum Exemption is up to Capital Gains.

A taxpayer can claim this Capital Gains Exemption while filing ITR in that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is extended to 10th January 2021 (in case tax audit is not applicable).

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Who can Claim an Exemption Under Section 54F of the Income Tax Act?

A taxpayer can claim exemption u/s 54F if all the below conditions are satisfied:

  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) other than House Property.
  3. On the date of sales, the taxpayer does not own more than one house property.
  4. A new Residential House is purchased before 1 year or after 2 years from the sale of the long term capital asset, or
  5. In case of construction of a new House Property, within 3 years from the sale of the residential House Property.
  6. A new Residential House should be in India.

What is the Amount of Exemption Available Under Section 54F of the Income Tax Act?

As mentioned above, the Amount of Exemption under Section 54F 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 gold in FY 2019-20 for Rs. 15,00,000. It was purchased in FY 2012-13 for Rs. 5,00,000. And Ajay purchased his second house property for Rs. 35,00,000 in FY 2019-20. Ajay will be able to claim deduction under section 54F as follows:

Particulars Amount
Sales Consideration 15,00,000
Less: Index Cost of Acquisition (5,00,000*289/200) (7,22,500)
Long Term Capital Gains 7,77,500
New House Property Purchase Price 35,00,000
Section 54F Exemption Amount (35,00,000*7,77,500/15,00,000) = 18,14,167 or 7,77,500 7,77,500
Refer Index Cost from here.
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54F of the Income Tax Act.
Tip
When full Net Consideration/Sales Value is invested, the full amount of Capital Gains is exempt under section 54F of the Income Tax Act.

What Happens to Exemption if New House Property is Sold?

The lock-in period of 3 years is applicable when exemption u/s 54F of the income tax act is claimed. And the following situations can arise:

Situation 1

When a new house is sold within 3 years from the date of purchase/construction.

Consequences

The exemption u/s 54F is withdrawn. And the amount of exemption availed will be reduced from the cost of the asset. And Capital Gains will be the total sales value minus the cost of the asset.

Situation 2

When a new house is sold after 3 years from the date of purchase/construction.

Consequences

The exemption u/s 54F is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains Tax on sale of house property sold. And capital gains will be taxed at 20%.

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What is the Capital Gains Account Scheme (CGAS)?

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase/construction of new property till the due date of submission of ITR, then it should be deposited in the Capital Gains Deposit Account Scheme. Taxpayer can claim exemption of amount already spent on construction/purchase of property along with the amount deposited in CGAS.

Keep in mind, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

FAQs

What is Net Consideration u/s 54F?

Net Consideration is the full Sales value/consideration received on sale of Long Term Capital Asset reduced by any expense incurred in connection with the transfer.
Net Consideration = Sales Value – Transfer Expenses.

Can NRI Claim exemption u/s 54F?

Yes, NRI can claim exemption u/s 54F of the Income Tax Act. Provided the LTCA sold and house property purchased is situated in India.

What will be the tax rate on capital gains earned if exemption u/s 54F is not claimed?

LTCA are taxed at special rates. It depends on the type of asset sold.
Movable Asset: 20% with Indexation,
Shares/Securities: 10% u/s 112A (above Rs. 1,00,000).

Section 54 of the Income Tax Act – Capital Gains Exemption

Exemption under section 54 of the Income Tax Act is available on Capital Gains on sale of one house property and purchase/construction of another house property. The amount of Exemption under Section 54 will be lower of:

  1. The Cost of new Residential House Property
  2. The Capital Gains on the sale of a property

A taxpayer can claim the Capital Gains Exemption under Section 54 while filing ITR for that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 10th January 2021.

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Who can Claim an Exemption Under Section 54 of the Income Tax Act?

A taxpayer can claim exemption u/s 54 if all the below conditions are satisfied:

  1. The taxpayer must be an Individual or HUF. The benefit of exemption u/s 54 is not available to the company, LLP, or Firm.
  2. The asset sold is a Long Term Capital Asset (Sold after 24 months).
  3. The asset sold is a Residential House Property. And any income earned from this property was shown under the head “Income From House Property”.
  4. A new Residential House is purchased before 1 year or after 2 years from the sale of the residential House Property, or
  5. In case of construction of a new House Property, within 3 years from the sale of the residential House Property.
  6. A new Residential House should be in India.
From FY 2019-20, a taxpayer can claim exemption u/s 54 in respect of investment made in 2 residential house properties. However, The exemption for the investment made, by way of purchase or construction, in 2 residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. This option can be exercised only once in a lifetime.
Tip
From FY 2019-20, a taxpayer can claim exemption u/s 54 in respect of investment made in 2 residential house properties. However, The exemption for the investment made, by way of purchase or construction, in 2 residential house properties shall be available if the amount of long term capital gains does not exceed Rs. 2 crores. This option can be exercised only once in a lifetime.

What is the Amount of Exemption Available Under Section 54 of the Income Tax Act?

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

  1. The Cost of New Residential House Property OR
  2. Capital Gains arising on the sale of a property.

Example: Ravi sold a house property in FY 2019-20 for Rs. 60,00,000. The property was purchased by him in FY 2013-14 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 deduction under section 54 as follows:

Particulars Amount
Sales Consideration 60,00,000
Less: Index Cost of Acquisition (30,00,000*289/220) (39,40,909)
Long Term Capital Gains 20,59,091
New House Property Purchase Price 45,00,000
Section 54 Exemption Amount 20,59,091
Refer Index Cost from here.
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What Happens to Exemption if New House Property is Sold?

The lock-in period of 3 years is applicable when exemption u/s 54 of the income tax act is claimed. And the following situations can arise:

Situation 1:

When a new house is sold within 3 years from the date of purchase/construction and the cost of a new house purchased is less than Capital Gains.

Consequences: The exemption u/s 54 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:

When a new house is sold within 3 years from the date of purchase/construction and the cost of a new house purchased is more than Capital Gains.

Consequences: The exemption u/s 54 is withdrawn. However, a taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54) while calculating capital gains.

Situation 3:

When a new house is sold after 3 years from the date of purchase/construction.

Consequences: The exemption u/s 54 is not withdrawn. A taxpayer will be able to claim the index cost of acquisition while calculating Capital Gains Tax on sale of house property. And capital gains will be taxed at 20%.

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What is the Capital Gains Account Scheme (CGAS)?

If a taxpayer is unable to utilize the whole or part of the sales consideration for purchase/construction of new property till the due date of submission of ITR, then it should be deposited in the Capital Gains Deposit Account Scheme. Taxpayer can claim exemption of amount already spent on construction/purchase of property along with the amount deposited in CGAS.

Keep in mind, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the last year in which 3 years expire.

FAQs

Can I claim exemption if I buy new property in the name of my spouse?

No. In order to claim exemption u/s 54, the property purchased has to be in the name of the seller. The exemption is not available if a new property is purchased in the name of the spouse.

Can NRI claim exemption u/s 54 on House Property purchased?

Yes, NRI can claim exemption u/s 54 of the Income Tax Act. Provided the house property sold and purchased is situated in India.

Is exemption allowed if the builder of a property fails to hand it over within 3 years?

Yes. The exemption is still allowed to the taxpayer u/s 54. Even when the builder of a property fails to hand it over to him.