Income Tax

Exemptions available under Capital Gain

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  Posted on June 16, 2021

Exemptions available under Capital Gain

To give some relied to tax payers on tax payable towards long term capital gain or short term capital gain few exemptions or deductions are available

The logic behind this exemptions is that to boost the investments avenues out of the arised capital gains

Exemptions available for long term capital gain

Section 54

If the residential house property, used for Residential purpose ,then the exemption under this section is available if following conditions

  • The assessee must be an individual or Hindu Undivided Family.
  • The assessee has held the house for more than 24 months.
  • Asset Transferred must be building and land appurtenant thereto
  • The assessee has purchased a new house one year before the date of sale or two years after the date of sale of the original house or if he is constructing a new house, within 3 years from the date of sale of the original house.
  • If the amount is deposited in a bank under the Capital Gains Account Scheme, 1988.
  • If the cost of the new house is equal to or more than the capital gain earned.
  • If the cost of the new house is less than the capital gain, then the difference amount is taxed at 20%.
  • If the new house is sold within 3 years from the date of purchase or construction, then the cost of the new house is deducted by the amount of capital gain exempted on the original house and the difference in the sale price of the new house will be treated as a short-term capital gain.

Section 54EC

  • Assessee is eligible for these exemption if he transferred land ,building or both
  • The assessee must invest a part of the capital gain or the whole of the gain in specified assets like bonds of NHAI or REC or Other bonds notified by Central Govt. within 6 months from the date of sale of the original asset.
  • Assessee can invest a maximum of Rs. 50 lakh in specified bonds in a financial year.
  • The assessee must retain the new asset for a minimum of 5 years if the bond is issued on or after 1st April 2018).

Section 54F

This is available subject to the following conditions:

  • The assessee must be an individual or a Hindu Undivided Family.
  • The long-term capital asset is not a residential house.
  • The assessee has purchased a new house one year prior to the date of sale or two years after the date of sale of the original house or if he is constructing a new house, within a period of 3 years from the date of sale of the original house.
  • If the cost of the new house is not less than the value of asset sold, full amount of capital gain is exempt from depreciation under Income Tax Act. But If a part of the capital gain is invested, then only that part will be exempted proportionately
  • cost of the new house * capital gain amount /Net consideration
  • and the balance amount will be taxable @ 20%.
  • If the full amount is not invested to buy a house or construct a house then it should be kept in the bank under Capital Gains Account Scheme, 1988. The deposit amount in that account should be utilized for the construction of a house or to buy a new house.
  • On the date of sale of the original asset, the assessee should not own more than one residential house apart from the new house. He should also not buy another house in 2 years or construct a new house in 3 years after such date (apart from the new house).

Section 54GB :

Capital gain on transfer of residential property not to be charged in certain cases.—

(1) Where,—

  • the capital gain arises from the transfer of a long-term capital asset, being a residential property (a house or a plot of land), owned by the eligible assessee (herein referred to as the assessee); and
  • the assessee, before the due date of furnishing of return of income under sub-section (1) of section 139, utilises the net consideration for subscription in the equity shares of an eligible company (herein referred to as the company); and
  • the company has, within one year from the date of subscription in equity shares by the assessee, utilised this amount for purchase of new asset,
  • then, instead of the capital gain being charged to income-tax as the income of the previous year in which the transfer takes place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

(a)  if the amount of the net consideration is greater than the cost of the new asset, then, so much of the capital gain as it bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45 as the income of the previous year; or

(b)  if the amount of the net consideration is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45 as the income of the previous year.

2) The amount of the net consideration, which has been received by thecompany for issue of shares to the assessee, to the extent it is not utilised by the company for the purchase of the new asset before the due date of furnishing of the return of income by the assessee under section 139, shall be deposited by the company, before the said due date in an account in any such bank or institution as may be specified and shall be utilised in accordance with any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and the return furnished by the assessee shall be accompanied by proof of such deposit having been made.

(3) For the purposes of sub-section (1), the amount, if any, already utilised by the company for the purchase of the new asset together with the amount deposited under sub-section (2) shall be deemed to be the cost of the new asset:

  • Provided that if the amount so deposited is not utilised, wholly or partly, for the purchase of the new asset within the period specified in sub-section (1), then,—
  • (i)  the amount by which—

(a) the amount of capital gain arising from the transfer of the residential property not charged under section 45 on the basis of the cost of the new asset as provided in sub-section (1),

exceeds—

(b) the amount that would not have been so charged had the amount actually utilised for the purchase of the new asset within the period specified in sub-section (1) been the cost of the new asset,

shall be charged under section 45 as income of the assessee for the previous year in which the period of one year from the date of the subscription in equity shares by the assessee expires; and

  • (ii)  the company shall be entitled to withdraw such amount in accordance with the scheme.

(4) If the equity shares of the company or the new asset acquired by the company are sold or otherwise transferred within a period of five years from the date of their acquisition, the amount of capital gain arising from the transfer of the residential property not charged under section 45 as provided in sub-section (1) shall be deemed to be the income tax return filing of the assessee chargeable under the head “Capital gains” of the previous year in which such equity shares or such new asset are sold or otherwise transferred, in addition to taxability of gains, arising on account of transfer of shares or of the new asset, in the hands of the assessee or the company, as the case may be.

(5) The provisions of this section shall not apply to any transfer of residential property made after the 31st day of March, 2017.

Eligible assessee means an individual or a Hindu undivided family;

Eligible company means a company which fulfils the following conditions, namely:—

  • it is a company incorporated in India during the period from the 1st day of April of the previous year relevant to the assessment year in which the capital gain arises to the due date of furnishing of return of income under sub-section (1) of section 139 by the assessee;
  • it is engaged in the business of manufacture of an article or a thing;
  • it is a company in which the assessee has more than fifty per cent share capital or more than fifty per cent voting rights after the subscription in shares by the assessee; and
  • it is a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 (27 of 2006);

Net consideration shall have the meaning assigned to it in the Explanation to section 54F;

New asset means new plant and machinery but does not include—

  • any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;
  • any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house;
  • any office appliances including computers or computer software;
  • any vehicle; or
  • 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.’.

Other Exemptions available for both Short term and long term capital gains :

Section 54B

To claim this exemption,

  • The capital gain earned on the sale of agricultural land will have to be reinvested in the purchase of agricultural land.
  • The land must be used for agricultural purposes for at least 2 years immediately before the transfer. If the capital gain is higher than the amount of purchase cost of the new agricultural land then the remaining balance will be taxed.
  • If the capital gain is less than the purchase cost of the new agricultural land then no tax will be charged.
  • If new asset transferred within 3 years from the date of Purchase then cost of acquisition of new asset reduced by exempted capital gain

Section 54D

  • Exemption is allowed for capital gain arising from industrial land or building that has been compulsorily acquired by the Government.
  • The asset should have been used for the industrial purpose for 2 years immediately before the transfer.
  • The exemption is allowed only if the capital gain will be invested to acquire land or building for the same industrial purpose.
  • This should be purchased within 3 years from the date of receipt of compensation.
  • If new asset transferred within 3 years from the date of Purchase then cost of acquisition of new asset reduced by exempted capital gain

Section 54G :

  • Exemption is allowed on the capital gain arising from the transfer of land, building, plant or machinery to shift an industrial undertaking from the urban area to the rural area.
  • The exemption is allowed provided the capital gain is reinvested to acquire land, building, plant or machinery in a rural area.
  • The said asset should be purchased within one year before or three years after the date of transfer
  • If new asset transferred within 3 years from the date of Purchase /construction then cost of acquisition of new asset reduced by exempted capital gain

Section 54GA

  • Exemption is allowed on the capital gain arising from the transfer of land, building, plant or machinery to shift an industrial undertaking from the urban area to Special Economic Zone provided the gain is reinvested to acquire land, building, plant or machinery in the Special Economic Zone.
  • It should be invested within one year before or three years after the date of transfer
  • If new asset transferred within 3 years from the date of Purchase /constructed then cost of acquisition of new asset reduced by exempted capital gain
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