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Section 54G of Income Tax Act – 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 54G of Income-tax Act which provides exemption in respect of capital gains arising from transfer of assets of industrial undertaking from urban area to any area other than an urban area.

What is Section 54G of the Income Tax Act?

Section 54G​ provides exemption from capital gains arising from the transfer of assets in the course of shifting an industrial undertaking from an urban area to a non-urban area. The exemption is allowed if the amount of capital gains is invested in new machinery or plant in the area where the undertaking is shifted. ​

Who can claim exemption under Section 54G?

​The exemption is available to all assesses, including individuals, HUFs, firms, or companies, if the industrial undertaking, located in an urban area, is shifted to any other area that is not an urban area. ​

What is considered an “urban area” for the purposes of Section 54G?

​​An “urban area” is any area within the limits of a municipal corporation or municipality that the Central Government declares as an urban area for the purposes of Section 54G​. The Central Government makes this determination based on factors such as population, concentration of industries, and the need for proper planning of the area. ​

What type of capital asset is qualified for Section 54G exemption?

​The exemption is available if a capital asset, such as plant, machinery, land, or building, or any right in land or building used for the purpose of an industrial undertaking situated in an urban area, is transferred as part of the shifting of the industrial undertaking to any area other than an urban area. ​

What type of new asset must be acquired or constructed to claim the Section 54G exemption?

​To claim this exemption, the capital gain arising from the transfer of the original asset should be used to purchase new plant or machinery, purchase or construct a building, shift the original asset and its establishment, or incur expenses on other purposes as specified in a scheme framed by the Central Government for this purpose. ​

What is the time limit for investing in the new asset for Section 54G exemption?

​The capital gain must be used for the specified purposes within 1 year before or 3 years after the date of transfer. Capital gain that has not been utilized within 1 year before the date of transfer or on or before the due date of furnishing the return of income for the specified purposes, should be deposited in a bank under capital gain account scheme on or before the due date of furnishing return of income. ​

Are there any specific requirements under section 54G for how the capital gain must be invested in the new asset?

The amount of exemption will be the lower of the following:

a) Amount of capital gains, whether long-term or short-term; or

(b) Aggregate of amount invested in new assets, expenses on transfer or establishment and amount deposited in capital gain account scheme.

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

​To claim the exemption, the capital gain must be used to purchase new plant or machinery, purchase or construct a building, shift the original asset and its establishment, or incur expenses on other purposes as specified in a scheme framed by the Central Government for this purpose. The specifics of how the capital gain is invested will vary depending on the type of new asset acquired or constructed.

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

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

a) Transfer of new asset within 3 years: If the new asset or any rights in it are sold within 3 years of its purchase or construction, the cost of the new asset will be reduced by the amount of capital gain that was previously exempt. The classification of the capital gain as long-term or short-term on the sale of the new asset will be determined based on the length of time it was held.

b) Non-Utilisation of amount deposited in capital gain account scheme: If the funds deposited in a capital gains account scheme are not used to move an industrial undertaking within 3 years after the date of transfer, the unspent deposit will be considered as capital gain in the relevant previous year in which the 3-year time period expires. The type of capital gain will be the same as the original gain.

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