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%.

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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.

Capital Gain Tax on Sale of Property/Land

Immovable Property or Land is considered to be a Capital Asset as per the Income Tax Act. A taxpayer who sells an immovable property or land should report such income or loss as Capital Gains it in the Income Tax Return and pay tax on it at the applicable rate. Capital Gain Tax on sale of property or land is determined on the basis of the nature of the capital gain. long term or short term. While the STCG on sale of immovable property is taxable at slab rates, the LTCG on sale of immovable property is taxable at 20% with indexation benefit under Section 112 of Income Tax Act.

Capital Gain Tax on Sale of Property / Land

Capital Gain can be of two types depending on the period of holding of the capital asset.

  1. Long Term Capital Gain (LTCG): If the taxpayer sells an immovable property or land held for more than 24 months, gain or loss on such sales is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL).
  2. Short Term Capital Gain (STCG): If the taxpayer sells an immovable property or land held for up to 24 months, gain or loss on such sale is a Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL).
The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.
Tip
The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.

Income Tax on Sale of Immovable Property

Income Tax on the sale of immovable property i.e. land, building, or house property is similar to the tax treatment of other capital assets.

Calculation of Long Term Capital Gain tax on sale of property in India

As per Section 112 of the Income Tax Act, LTCG on the sale of immovable property in India is taxable at 20% with an indexation benefit. To take the indexation benefit, the taxpayer can calculate the indexed cost of the acquisition using Cost Inflation Index i.e. CII to compute the long term capital gain. The cost of Improvement is the expense incurred by the taxpayer for making addition or improvements to the capital asset. The taxpayer can also calculate the Indexed Cost of Improvement using the CII.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Indexed Cost of Acquisition (XXXX)
Less Indexed Cost of Improvement (XXXX)
Less Exemption u/s 54 to 54GB (XXXX)
  Long Term Capital Gain XXXX
  • Sale Consideration = In the case of immovable property, as per Section 50C of Income Tax Act, sale consideration should be the sale value of capital asset or value adopted by stamp duty valuation authority whichever is higher.
  • Transfer Expenses = expenses incurred exclusively for the sale of the capital asset.
  • Indexed Cost of Acquisition = Cost of Acquisition * (CII of year of Sale / CII of year of Purchase)
  • Indexed Cost of Improvement = Cost of Improvement * (CII of year of Sale / CII of year of Improvement)
  • Capital Gain Exemption – Taxpayer can claim capital gain exemption under Section 54 to 54GB on fulfilling the specified conditions.

Calculation of Short Term Capital Gain tax on sale of property in India

The Short Term Capital Gain on the sale of immovable property is taxable as per the slab rates. There is no indexation benefit in the case of a Short Term Capital Gain. Further, the capital gain exemption under Section 54 to 54GB is also not available. Thus, the Capital Gain is calculated on the basis of the cost of acquisition, cost of improvement, and transfer expenses.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Cost of Acquisition (XXXX)
Less Cost of Improvement (XXXX)
  Short Term Capital Gain XXXX

Capital Gains on Sale of Property before Possession

Many times the taxpayer will sell the immovable property before receiving the possession of the same. Let’s understand the treatment of capital gains in that situation.

You have booked a property that is still under construction. So essentially you have acquired the rights for the under-construction property and not the property itself. Now before the construction completes, you want to sell the rights. Now the first question that comes to your mind is how do I calculate the capital gains for the same and what would be my tax liability?

Example

Darshil paid INR 20 Lakh on 01/01/2012 to book a house in a housing scheme. The scheme will give possession of the property on 01/01/2016. Darshil finds a better scheme and wants to sell the rights in this scheme. The taxability of the capital gains will depend on the time gap between the date of booking of the property and the date of agreement to transfer the rights in the under-construction property.

Various Situations

  1. If Darshil transfers the rights before 01/01/2015
    • Then it will result in short term capital gains since the holding period is less than 36 months.
    • Indexation benefit is not applicable
    • The capital gains will be taxable at the normal slab rate applicable to the individuals.
    • Since it will be short term capital gains, no capital gain exemption is available to save the capital gains tax on property.
  2. If Darshil transfers the rights after 01/01/2015
    • Then it will result in long term capital gains since the holding period is more than 36 months
    • Indexation benefit is applicable to the amount payable to the builder, stamp duty, and also registration fees.
    • The capital gains will be taxable at 20%
    • Since it will be long term capital gains, the exemption under Section 54F and Section 54EC will be available.
    • You can not claim the exemption under Section 54 because the exemption is for the purchase of new residential property against the sale of existing residential property. Here what you are selling is a right to acquire a residential house and not the residential house itself. Many people treat the sale of an under-construction property at par with a residential house for the purpose of claiming long term capital gain exemption which is incorrect and the taxpayer may receive a scrutiny notice.

Set Off & Carry Forward Loss on Sale of Immovable Property

  • The loss on sale of an immovable property held for more than 24 months is a Long Term Capital Loss. As per the income tax rules for set off and carry forward of losses, the taxpayer can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. They can carry forward the remaining loss for 8 years and set off against LTCG only.
  • The loss on sale of an immovable property held for up to 24 months is a Short Term Capital Loss. The taxpayer can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). They can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.

ITR Form & Due Date for Income from Sale of Immovable Property

  • ITR Form: The taxpayer should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website since income on the sale of immovable property such as land, building, or house property is Capital Gains.
  • Due Date – 31st July of the Assessment Year
    • Up to FY 2019-20 – 31st July
      31st July – for taxpayers to whom Tax Audit is not applicable
      30th September – for taxpayers to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for taxpayers to whom Tax Audit is not applicable
      31st October – for taxpayers to whom Tax Audit is applicable
  • Tax Audit: Since the income on the sale of unlisted stock is a Capital Gains Income, the applicability of tax audit under Section 44AB need not be determined.

How to save capital gains tax on sale of immovable property?

To save STCG on sale of immovable property, the taxpayer can set off Short Term Capital Loss from any other capital asset against it. Further, since STCG on sale of immovable property is taxable at slab rates, the taxpayer can claim Chapter-VIA deductions too.

To save LTCG on the sale of immovable property, the taxpayer can set off Short Term Capital Loss or Long Term Capital Loss from any other capital asset against such LTCG. Further, since LTCG on sale of immovable property is taxable at a special rate of 20%, the taxpayer cannot claim Chapter-VIA deductions against it. Taxpayer can claim following capital gain exemptions to save capital gain tax on sale of residential property:

  • Section 54F – Exemption on sale of residential house property on investment in another residential house property.
  • Section 54GB – Exemption on sale of residential house property on investment in equity shares of an eligible company.

Further, taxpayer can claim following capital gain exemptions to save capital gain tax on sale of immovable property:

  • Section 54EC – Exemption on sale of land or building on investment in NHAI/REC bonds.
  • Section 54EE – Exemption on sale of any long-term capital asset on investment in units of a specified fund.

A taxpayer can claim the exemption by reinvesting the sale proceeds into a specified capital asset to lower the capital gains and save taxes. The taxpayer must hold the new asset for the specified period as per relevant section. However, if he/she sells the asset before specified time period, they must report it as income in the relevant financial year and pay tax at applicable rate. The taxpayer has an option to open an account under Capital Gains Account Scheme and park sale proceeds in it until they invest in specified asset to claim the exemption.

Capital Gain Tax on Sale of Inherited Property

When a taxpayer receives a property as inheritance, it is not taxable for the receiver. However, when the taxpayer sells such property, it is taxable as Capital Gains. Below are the steps to calculate Capital Gains tax on sale of inherited property:

  • STCG = Sale Consideration – Transfer Expenses – Cost of Acquisition – Cost of Improvement
  • LTCG = Sale Consideration – Transfer Expenses – Indexed Cost of Acquisition – Indexed Cost of Improvement

The taxpayer must note the following for calculating Capital Gains:

  • Period of Holding to determine STCG or LTCG would be from the date of purchase by the previous owner
  • Cost of Acquisition would be the cost of the previous owner
  • Indexed Cost of Acquisition would be computed based on the year of acquisition of the previous owner

FAQs

How do you calculate long term capital gains on the sale of immovable property?

Income from sale of immovable property after 24 months of purchase is a Long Term Capital Gain taxable at 20% with benefit of indexation. In case of LTCG, the taxpayer should calculate Indexed Cost of Acquisition using Cost Inflation Index (CII) issued by income tax department to compute the LTCG.
LTCG = Sale Consideration – Expenses – Indexed Cost of Acquisition – Indexed Cost of Improvement

How can I save capital gains tax on the sale of immovable property?

You can claim capital gain exemption on investment in a specified asset and on fulfilling the specified sections. To save tax on Long Term Capital Gains from the sale of immovable property, the taxpayer can claim an exemption under Section 54, Section 54EC, Section 54EE, or Section 54GB of the Income Tax Act. These exemptions are not available for Short Term Capital Gains.

How to calculate tax on sale of inherited property?

The property received as inheritance is not taxable in the hands of the receiver at the time of inheritance. However, when the taxpayer sells the inherited property, it is taxable as capital gains. To calculate the capital gain, cost of acquisition is taken as cost to previous owner. The period of holding is calculated from the date of purchase of the previous owner.

Section 54EC of Income Tax Act : Capital Gains Exemption on Sale of Land or Building

The income tax department has laid down a list of Capital Gain Exemption on the sale of specified assets by the taxpayer. The taxpayer on fulfilling certain conditions can claim such exemptions to reduce their Capital Gains Tax. Exemption under Section 54EC of the Income Tax Act is available on Capital Gains on the sale of land or building or both being LTCA and purchase of bonds of NHAI or REC. 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.

Budget 2018 Update

Under Budget 2018, the finance minister proposed to amend Section 54EC of the Income Tax Act. The new provision was applicable from 1st April 2019 i.e. FY 2019-20 onwards.

Section 54EC provision upto FY 2018-19

As per the older provision, if the taxpayer sells any long term capital asset, he/she can claim capital gain exemption under Section 54EC on investment in long term specified assets. These specified assets include NHAI or REC bonds redeemable after 3 years issued on or after 1st April 2007.

Section 54EC provision FY 2019-20 onwards

As per the amended provision, if the taxpayer sells a long term capital asset being land or building or both, he/she can claim capital gain exemption under Section 54EC on investment in long term specified assets. These specified assets include NHAI or REC bonds redeemable after 5 years issued on or after 1st April 2018.

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

A taxpayer can claim an exemption u/s 54EC if he/she fulfills all the below conditions:

  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 in nature if the taxpayer holds it for at least 24 months before selling.
  3. The taxpayer invests Capital Gains within 6 months from the date of transfer
  4. Taxpayer invests in 54EC bonds of 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 INR 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.

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

As mentioned above, the Amount of Exemption under Section 54EC will be the 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 2021-22 for Rs. 60,00,000. It was purchased in FY 2016-17 for Rs. 30,00,000. And Jay purchased NHAI bonds for Rs. 45,00,000 in FY 2021-22. 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*317/264) (36,02,272)
Long Term Capital Gains 23,97,728
NHAI Bonds Price 45,00,000
Section 54EC Exemption Amount 23,97,728
Refer Index Cost from here.
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You can calculate the Index Cost of acquisition of property from here.
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What happens to exemption if taxpayer sells the 54EC Bonds?

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

Situation 1:

When the taxpayer sells the bonds within 5 years from the date of purchase.

Consequences: The exemption under Section 54EC 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.

Situation 2:

When the taxpayer sells the bonds after 5 years from the date of purchase.

Consequences: The exemption under Section 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 movable assets and taxed at 20% with Indexation.