Section 54D allows exemption from the capital gains arising from compulsory acquisition of land or building which forms a part of an industrial undertaking. The exemption is allowed if the amount of capital gains is invested in another land or building.
What is a capital asset?
Any kind of property owned by an assessee is known as a capital asset. It may or may not be connected to business or profession.
| Category | Examples |
|---|---|
| Movable or immovable | Land, buildings, house property, etc. |
| Tangible or intangible | Vehicles, patents, trademarks, leasehold rights, etc. |
| Fixed or circulating | Machinery, jewellery, etc |
What are the different types of capital assets under income tax?
For capital gains, the assets are bifurcated into two major sections:
Short-term capital assets-
Capital assets that the individual holds for not more than 36 months are called short-term capital assets. The gains from selling these assets are called short-term capital gains.
Long-term capital assets-
The assets the assessee holds for more than 36 months are called long-term capital assets. The gains from selling these assets are called long-term capital gains.
If unlisted shares, land, or other immovable property are held for more than 24 months, it is considered a long-term capital asset.
The following assets shall be treated as long-term capital assets if they are held for more than 12 Months:
- Listed securities
- Units of Equity oriented fund
- Zero-coupon bond
FAQ for claiming exemption under section 54D
Who can claim exemption under section 54D?
This exemption is available to all assessee i.e. individual, HUF, firm or company, etc.
Which capital asset should be transferred to claim the exemption under section 54D?
The exemption under Section 54D is available for the capital gain arising by way of compulsory acquisition of land or building, forming part of an Industrial undertaking. Such land or building should be used by the assessee for the business of the industrial undertaking for a period of 2 years before the date of compulsory acquisition.
The land or building forming part of the industrial undertaking may be a short-term capital asset or a long-term capital asset. Both of them enjoy the exemption.
Which new asset should be acquired for claiming exemption under section 54D?
The exemption is allowed if assessee purchases any other land or building or any right in any other land or building or construct any other building for the purposes of shifting or re-establishing the undertaking or setting up another industrial undertaking.
What is the maximum amount of exemption allowed under section 54D?
Exemption under section 54D will be lower of the following:
• Amount of capital gains arising on transfer of land or building; or
• Investment in new land or building [including the amount deposited in Capital Gains Account Scheme]
What is the prescribed time limit for investment in new asset under section 54D?
The assessee has to purchase new asset within a period of 3 years after the date of compulsory acquisition of the undertaking.
Is the benefit of depositing amount of capital gains in capital gain account scheme is available to claim exemption?
Yes, if the capital gain arising on transfer of the land or building is not utilised (in whole or in part) for purchasing any land or building or any right in any other land or building of for construction of any building till the date of filing the return of income, then the benefit of exemption can be availed by depositing the unutilised amount in Capital Gains Deposit Account Scheme. The new land or building can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 3 years.
What are the circumstances in which exemption under section 54D can be withdrawn?
The exemption claimed by assessee under section 54D can be withdrawn in the following circumstances:
a) Transfer of new land or building within 3 Years: If a taxpayer purchases new land or building to claim exemption under section 54D and subsequently transfers such land or building within a period of 3 years from the date of its acquisition/construction, then the benefit granted under section 54D will be withdrawn.
If the new land or building is sold within a period of 3 years from the date of its purchase/construction, then at the time of computation of capital gain arising on transfer of the new land or building, the amount of capital gain claimed as exemption under this section will be deducted from the cost of acquisition of the such land or building.
b) Amount deposited in capital gains scheme account is not utilized in prescribed time limit: If the amount deposited in the Capital Gains Account Scheme in respect of which the taxpayer has claimed exemption is not utilised within the specified period for purchase or construction of another land or building, then the unutilised amount will be taxed as income for the previous year in which the specified period of 3 years gets completed.
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