Capital gains taxation in India has evolved significantly in recent years. The Income Tax Act, 1961, provides specific exemptions that can help reduce the tax burden if reinvestment conditions are met. With recent changes such as capped reinvestment limits, uniform tax rates, and revised deduction rules, the approach to capital gains planning has become more complex.
In this blog, we will understand the key exemptions available under capital gains in India as of July 2025.
What are Capital Gains?
Capital gains arise when a capital asset is sold for a price higher than its purchase price. These gains are categorised into:
- Short-Term Capital Gains (STCG): Gains arising from the sale of assets held for less than the prescribed holding period (e.g., less than 24 months for immovable property, less than 12 months for listed shares).
- Long-Term Capital Gains (LTCG): Gains arising from the sale of assets held beyond the prescribed holding period.
The taxation and exemption provisions differ for STCG and LTCG, and various sections of the Income Tax Act, 1961, provide relief to taxpayers under specific conditions.
Latest Amendments Impacting Capital Gains
- LTCG Tax Rate Unified: The LTCG tax rate across asset classes has been standardised at 12.5% for all taxpayers (excluding indexation benefit).
- STCG Tax Rate Revision: STCG on listed securities is now taxed at 20%, revised from the earlier 15%.
- Cap on Exemptions: Sections 54 and 54F now have a cap of Rs. 10 crore on reinvestment for claiming exemptions.
- Indexation benefit limited: Taxpayers selling property acquired before July 23, 2024, can choose between the old system (with indexation) or the new system (without indexation at a 12.5% rate).
- Interest deduction clarification: From FY 2024-25 onwards, interest claimed under Section 24(b) or Chapter VI-A cannot be added to the cost of acquisition or improvement when computing capital gains.
Exemption Provisions under the Income Tax Act, 1961
1. Section 54: Exemption on Sale of Residential House Property
This section applies to individuals and Hindu Undivided Families (HUFs) who sell a residential property and invest the capital gains in another residential property.
- Eligibility: LTCG arising from the sale of a residential house.
- Conditions: New property must be purchased within 1 year before or 2 years after the date of transfer, or constructed within 3 years.
- Limit: Investment amount eligible for exemption is capped at Rs. 10 crore from AY 2024-25 onwards.
2. Section 54F: Exemption on Sale of Any Long-term Capital Asset (other than a house)
This section provides an exemption on LTCG arising from the sale of any capital asset other than a residential house, if the proceeds are invested in a residential house.
- Eligibility: Individuals or HUFs not owning more than one residential house (except the new one).
- Conditions: Similar time frame as Section 54 for reinvestment.
- Exemption Amount: Proportional to the investment made out of the net sale consideration.
- Cap: 10 crore limit applies here as well.
3. Section 54EC: Exemption through Investment in Specified Bonds
This section provides for an exemption on LTCG arising from the sale of land or buildings if the amount is reinvested in specified bonds such as those issued by NHAI, REC, PFC, etc.
- Conditions: Investment must be made within 6 months of the transfer.
- Lock-In Period: 5 years.
- Maximum Investment Limit: 50 lakhs in a financial year.
4. Section 54B: Exemption on Transfer of Agricultural Land
Section 54B provides relief to individual or HUF taxpayers who transfer agricultural land used for agricultural purposes and reinvest the proceeds into another agricultural land.
- Eligibility: Land that is being transferred should have been used by the taxpayer or parents for agricultural purposes for at least two years preceding the date of transfer.
- Conditions: Reinvestment must be made within 2 years from the date of transfer.
- Quantum of exemption: Equivalent to the amount reinvested.
5. Section 54D: Compulsory Acquisition of Industrial Land or Building
This section provides an exemption if the industrial land or building is compulsorily acquired by the government and the compensation is reinvested in another industrial undertaking.
- Eligibility: The Asset must have been used for an industrial purpose for a minimum of 2 years before acquisition.
- Reinvestment Time Frame: 3 years from the date of receipt of compensation.
6. Section 54G: Shifting of Industrial Undertaking from Urban to Rural Areas
When a taxpayer shifts an industrial undertaking from an urban area to any non-urban area, exemption is available on capital gains arising from the transfer of plant, machinery, or buildings if the proceeds are reinvested in acquiring new assets for the new location.
7. Section 54GA: Shifting of Industrial Undertaking to Special Economic Zone (SEZ)
Like Section 54G, this provision provides an exemption when capital gains from the transfer of assets used in an industrial unit are invested in moving operations to a Special Economic Zone.
8. Section 54EE: Investment in Notified Units
Capital gains up to Rs. 50 lakhs can be exempt if invested in units of specified funds notified by the Central Government. The investment must be made within 6 months and has a lock-in period of 5 years.
Note: This exemption is available only for gains made from long-term assets.
Capital Gains Account Scheme (CGAS)
In cases where the taxpayer is unable to reinvest the capital gains before the due date of filing income tax returns, it is mandatory to deposit the unutilized amount in the Capital Gains Account Scheme. This deposit preserves the eligibility to claim exemption until the actual reinvestment is made within the prescribed time limits.
Conclusion
Capital gains exemptions under the Indian Income Tax Act, 1961, provide a lot of tax-saving opportunities. However, the evolving legislative environment demands a thorough understanding of the conditions, caps, and timelines involved. With changes such as the capping of exemptions under Sections 54 and 54F and the withdrawal of indexation for certain asset classes, taxpayers must now plan capital asset transactions with greater care and diligence.
You need to maintain detailed records, utilise the Capital Gains Account Scheme when necessary, and consult professionals for high-value transactions to ensure compliance with the latest provisions and to optimise tax liability.
