Exemption related to Capital gain.
Sec 54,Sec 54EC, Sec 54GB How to save capital gain tax that arise from sale of House property.
provisions relating to sec 54?
1. Basic conditions
Following conditions should be satisfied to claim the benefit of section 54.
- The benefit of section 54 is available only to an individual or HUF.
- The asset transferred should be a long-term capital asset, being a residential house property.
- Within a period of one year before or two years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house. In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).
2. Capital Gain exemption
Exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only(Refer para 3 below i.e investment made in two house properties). No exemption can be claimed in respect of house purchased outside India.
3. Investments made in two house properties.
With effect from Assessment Year 2021-22, the Finance Act, 2020 has amended Section 54 to extend the benefit of exemption in respect of investment made in two residential house properties.The exemption for investment made, by way of purchase or construction, in two residential house properties shall be available if the amount of longterm capital gains does not exceed Rs. 2 crores. If assessee exercises this option, he shall not be entitled to exercise this option again for the same or any other assessment year.
Conclusion:
i) Yes, the option is available for investing in two residential properties provided if the long-term capital gain does not exceed 2 crores. However, if the personexercise this exemption, then he will lose his opportunity on Sec 54 for the same and any other assessment year.
Provisions relating to sec 54EC
Conditions for sec 54EC:
| Exemption under section 54EC is available to – | All the categories of persons |
| The capital asset transferred should be – | Land or building or both. Such land or building or both should be a long term capital asset. |
| Amount of capital gain should be invested in – | Long term specified asset (Refer definition of specified asset) |
Rules relating to investment:
All categories of persons are eligible to avail exemption benefit under section 54EC of the Income Tax Act.
2. The exemption is available only towards the capital gain arisen on account of transfer of long term capital asset (being land or building or both).
3. The assessee has invested the amount of capital gain (wholly or partly) in the long term specified assets.
4. The amount should be invested within a period of 6 months from the date of transfer.
5. The investment in the long term specified assets by an assessee during the Financial Year cannot exceed INR 50 Lakhs.
6.The investment in the long term specified assets by an assessee (from the capital gain arising from the transfer of one or more land or building or both) cannot exceed INR 50 Lakhs during the financial year in which the land or building or both is transferred and in the subsequent financial year.
i.eThe maximum exemption under sec 54EC is subjected to 50 lakhs.
Definition of investment in specified asset:
| Investment Period | Particulars |
| On or after 1st April 2007 but before 1st April 2018 | The bonds issued on or after 1st April 2007 but before 1st April 2018 by – 1. National Highway Authority of India. 2. Rural Electrification Corporation Limited. 3. Any other bond as notified in the official gazette. The bonds should be redeemable after 3 years. |
| On or after 1st April 2018 | The bonds issued on or after 1st April 2018 by – 1. National Highway Authority of India. 2. Rural Electrification Corporation Limited. 3. Any other bond as notified in the official gazette. The bonds should be redeemable after 5 years. |
Conclusion:
The amount of Exemption is:
i) the amount of capital gain invested in long term specified assets (or)
ii) INR 50 lacs, which ever is lower.
Provisions relating to sec 54GB
| Exemption under section 54EC is available to – | Individual and HUF |
| The capital asset transferred should be – | Land or building or both. Such land or building or both should be a long term capital asset. |
| Nature of capital asset | Long term capital |
Investment of capital gains
The amount of capital gains shall be invested in ansubscription of equity shares of eligible company.
Eligible company means.
I) The company which is incorporated in India
ii) The company should have been incorporated during the previous year in which the capital gain has arisen to the subsequent financial year up to the due date of furnishing of the income tax return.
(i.e. the incorporation shall be in between the 1st April of previous year of relevant assessment year and up to due date of filing of return of such previous year.)
iii) The company is engaged in the business of manufacturing of an article or a thing.
iv) The company in which the assessee has more than 50% share capital or more than 50% voting rights after the subscription in equity shares by the assessee.
V) The company should qualify to be a medium or small enterprise under the Micro, Small and Medium Enterprises Act, 2006 or the same is an eligible start-up.
Utilization of funds by the company through such subscription:
The company should utilize the amount for purchasing the new asset (Refer new asset definition below). The amount should be utilized within a period of one year from the date of subscription.
(i) Any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;
(ii) Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house;
(iii) Any office appliances including computers or computer software;
(iv) Any vehicle; or
(v) Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.’.
Amount of exemption
If Cost of new asset is more than or equal to the amount of net consideration(Refer below) then,
Entire capital gain would be exempt
If cost of new asset is less thanthe amount of net consideration then,
Proportionate capital gain would be exempt in following manner –
(investment in new asset * capital gain)/ net consideration.
Net Consideration means Full value of consideration (-) any expenditure exclusively incurred on account of transfer.
Withdrawal of exemption under section 54GB
The equity shares of the company and the new assets acquired by the company cannot be transferred for a period of five years from the date of acquisition. However, in case the of transfer, the exemption allowed under section 54GB would be withdrawn.
The amount of exemption claimed under section 54GB would be taxable in the previous year in which the equity shares of the company or the new assets.