FAQ on Section 54GB-Capital Gain Exemption

Introduction

The Income-tax Act allows exemption from capital gains tax if the amount of capital gains or sale consideration, as the case may be, is further invested in specified new assets.

These exemptions are as under the following sections:
a) Section 54- Capital Gain arising from the transfer of residential house property
b) Section 54B– Capital Gain arising from the transfer of land used for agricultural purpose
c) Section 54D– Capital Gains on compulsory acquisition of land and building, forming part of industrial undertaking
d) Section 54EC– Capital Gain not be charged on investment in certain bonds
e) Section 54EE– Capital Gain not to be charged on investment in units of a specified fund
f) Section 54F – Capital Gain on transfer of a long term capital asset other than a house property
g) Section 54G– Capital Gain arising on transfer of assets in case of shifting of industrial undertaking from the urban area
h) Section 54GA– Capital Gain arising on transfer of assets in case of shifting of industrial undertaking from the urban area to any Special Economic Zone
i) Section 54GB​- Capital Gain on transfer of residential property

THIS ARTICLE QUICKLY EXPLAIN SECTION 54GB OF INCOME-TAX ACT WHICH PROVIDES EXEMPTION IN RESPECT OF CAPITAL GAINS ARISING FROM TRANSFER OF RESIDENTIAL PROPERTY.

What is Section 54GB of the Income Tax Act?

​​Section 54GB​ provides an exemption on the capital gain earned from selling a long-term capital asset being residential property (a house or plot of land. This exemption can be availed if the assessee invests the net consideration in equity shares of an eligible company and the company uses this investment to buy new plant and machinery. ​

Who can claim an exemption under Section 54GB?

​This exemption is available only to an ‘Individual’ or a ‘Hindu Undivided Family’. ​

Which capital assets are qualified for Section 54GB exemption?

​​The exemption under Section 54GB​ is available only if capital gain arises from the transfer of a long-term capital asset which is residential property (a house or plot of land) (‘original asset’). The exemption is available only if the original asset is transferred between April 1, 2012 and March 31, 2017. However, if the investment is to be made in an eligible start-up, the original asset can be transferred up to March 31, 2022. ​

Where is the assessee required to invest for Section 54GB exemption?

​The exemption is allowed if net consideration is invested in equity shares of an ‘eligible company’ and such a company utilizes this amount to purchase new assets. ​

What is an eligible company?

​An eligible company is one that is incorporated in India after April 1 of the previous year in which capital gains arise, is engaged in the business of manufacture of any article or thing or in an eligible business, the transferor (assessee) of residential property has more than 25% share capital (or voting right) of such company (after subscription), and the company is either a SME under the MSME Act, 2006 or an eligible start-up. ​

What is considered an eligible start-up?

​’Eligible Start-up’ means a company engaged in eligible business and satisfies the following conditions: It is incorporated between April 1, 2016 and March 31, 2023, the total turnover of its business does not exceed Rs. 100 crore in any of the previous years between April 1, 2016 and March 31, 2021, and it has been certified as a start-up by the Inter-Ministerial Board of Certification notified by the Central Government. ​

What is the time limit to invest in new assets for Section 54GB exemption?

​The assessee should utilize the amount of net consideration from the original asset for the purchase of equity shares of an eligible company or eligible start-up before the due date for furnishing of income-tax return. ​

What is the time limit to invest in the new asset by the eligible company?

​The eligible company should utilize the amount for the purchase of new assets within 1 year from the date of subscription in equity shares by the assessee.

If the company does not utilize the amount for the purchase new asset before the due date of furnishing of return of income by the transferor (assessee), it shall be deposited by the company in the capital gain account scheme.

What is the maximum amount of exemption allowed under section 54GB?

​The amount of exemption cannot exceed the amount of capital gain ​

How to compute exemption under section 54GB?

The quantum of exemption shall be calculated as follows:

A x B/C

Wherein.

A = Investment in the new asset by the eligible company

B = Capital gains

C = Net Sales Consideration

What are the circumstances in which exemption under section 54GB can be withdrawn?

​​The exemption claimed by assessee under s​ection 54F can be withdrawn in the following circumstances:

a) Shares of the eligible company sold by the assessee: If the individual or HUF sells or otherwise disposes of the equity shares in the eligible company within a period of 5 years from the date of purchase, the earlier granted exemption or proportionate exemption on the capital gain will be considered as long-term capital gain and will be subject to tax in the year of sale or transfer.

b) New Asset sold by the eligible company: If the new asset, such as plant or machinery, is sold or transferred by the eligible start-up company within 5 years (3 years in case of computer or computer software) from the date of acquisition, the previous exemption given on the capital gains invested in the company will be considered as a long-term capital gain and subject to taxation in the year in which the asset is sold or transferred.

c) Non-utilisation of the amount deposited in the capital gain account scheme: When the eligible company fails to use the funds deposited in the capital gains scheme account to acquire new assets within one year of subscribing to equity shares, the earlier granted exemption (or proportionate exemption) will be considered as long-term capital gain of the assessee for the financial year in which the one-year time limit expires.