Exemptions for Capital Gains
Introduction
Capital gains may be exempted if the capital asset meets specific criteria or if the gains are reinvested in prescribed assets.
Exemptions for Reinvestment
The Income-tax Act allows exemption from capital gains tax if the amount of capital gains or consideration, as the case may be, is further invested in specified new assets. These exemptions are as follows:
| Section | Eligible Assessee | Nature of Capital Asset | Type of Original Asset | Type of New Asset | Time Limit for Investment | Amount of Exemption |
|---|---|---|---|---|---|---|
| Section 54 | Individual and HUF | Long-term capital asset | Residential house property | Residential house property situated in India | For purchase: Within 1 year before or 2 years after the date of transfer For construction: Within 3 years from the date of transfer |
Lower of the following: – Rs. 10 crore, or – Aggregate of amount invested in new residential house property and amount deposited in the Capital Gains Account Scheme (See Note 1) |
| Section 54B | Individual and HUF | Short-term or Long-term | Land used for agricultural purposes for at least 2 years immediately preceding transfer | Agricultural land | Within 2 years after the date of transfer | Amount invested in new agricultural land and amount deposited in the Capital Gains Account Scheme |
| Section 54D | Any assessee | Short-term or Long-term | Land and/or building used by the assessee for industrial purposes for 2 years immediately preceding compulsory acquisition | Land or building for shifting, re-establishing or setting up a new industrial undertaking | Within 3 years after the date of compulsory acquisition | Aggregate of amount invested in new land or building and amount deposited in the Capital Gains Account Scheme |
| Section 54EC | Any assessee | Long-term capital asset | Land or building or both | Bonds issued by NHAI, REC, HUDCO, IREDA or other notified bonds | Within 6 months after the date of transfer | Lower of the following: – Rs. 50,00,000, or – Amount invested in specified bonds |
| Section 54EE | Any assessee | Long-term capital asset | Any capital asset | Units of notified fund for financing start-ups | Within 6 months after the date of transfer | Lower of the following: – Rs. 50,00,000, or – Amount invested in notified fund |
| Section 54F | Individual and HUF | Long-term capital asset | Any capital asset other than residential house property | Residential house property situated in India | For purchase: Within 1 year before or 2 years after the date of transfer For construction: Within 3 years after the date of transfer (See Note 2) |
Exemption is computed as per the following formula: Eligible Investment × Long-term Capital Gain / Net Sale Consideration Note: Eligible investment shall not exceed Rs. 10 crore |
| Section 54G | Any assessee | Short-term or Long-term | Specified assets of an industrial undertaking in an urban area | Assets of an industrial undertaking in a non-urban area | Within 1 year before or 3 years after the date of transfer | Amount invested in new assets or amount deposited in the Capital Gains Account Scheme |
| Section 54GA | Any assessee | Short-term or Long-term | Specified assets of an industrial undertaking in an urban area | Specified assets of an industrial undertaking in a Special Economic Zone (SEZ) | Within 1 year before or 3 years after the date of transfer | Aggregate of amount invested in new asset or transfer of establishment and deposited in capital gain account scheme |
Note 1 – Under Section 54, exemption for investment in two residential houses is allowed only if capital gains do not exceed Rs. 2 crores, and can be claimed only once in a lifetime.
Note 2 – Under Section 54F, the exemption is denied if the assessee owns more than one house on the transfer date.
Deposit in Capital Gains Account Scheme (CGAS) – Common Provision (Sections 54 to 54GA):
Where the assessee has not utilised the capital gains for purchase or construction of the new asset up to the due date of filing the return under section 139(1), they may deposit the unutilized amount in CGAS with an authorised bank before the due date of filing the return.
The amount so deposited must be utilised within the prescribed time limit, as specified under the respective section.
However, no CGAS deposit is required for claiming exemption under Sections 54EC and 54EE.
Withdrawal of Exemption
- Non-utilisation of amount deposited in CGAS
If the deposited amount is not utilised within the specified period, it is treated as a capital gain in the year in which the time limit expired. - Transfer of new asset within Lock-in Period
If the new asset (house, land, bonds, or specified asset) is transferred, converted into money, or used as security for a loanwithin the prescribed period (generally 3 years; 5 years for 54EC), the exemption is withdrawn. The cost of acquisition is reduced by the amount of exemption claimed, or the exempted gain becomes taxable as capital gain. - Section 54F – Special Conditions:
If the assessee acquires or constructs a second residential house (other than the new one) within 2/3 years of transfer, the exempted LTCG becomes taxable in the year of such acquisition or construction.
Exemptions at Source (Section 10):
Section 10 of the Income-tax Act lists incomes that are fully excluded from total income and not taxed under any of the five heads.
Certain capital gains are also exempt under this section:
| Section | Exempt Capital Gains |
| 10(4E) | Gains from non-deliverable forward contracts or offshore derivatives (non-residents). |
| 10(H) | Income from shares transfer in IFSC leasing |
| 10(10D) | Life insurance proceeds (including ULIPs) |
| 10(23FF) | Gains from relocation of offshore funds (Indian company shares). |
| 10(33) | Gains from Unit Scheme, 1964 units |
| 10(37) | Gains from compulsory acquisition of urban agricultural land. |
| 10(37A) | Gains from Andhra Pradesh land pooling scheme |