Section 54GB: Capital Gain Exemption on sale of residential property

Important Keyword: Capital Gain Exemption, Sale of Property, Section 54GB.

Section 54GB: Capital Gain Exemption on sale of residential property

In the realm of tax exemptions, the Income Tax Act offers avenues for relief on capital gains, with one such provision found in Section 54GB. This particular section extends a helping hand to individuals or Hindu Undivided Families (HUFs) grappling with capital gains resulting from the sale of a residential property.

Capital Gains investment under Section 54GB

To alleviate the burden of Capital Gains Tax stemming from the sale of a residential property, taxpayers can seek solace in Section 54GB of the Income Tax Act. This provision extends an exemption opportunity applicable to the sale of a residential property, be it a house or a plot of land, categorized as a long-term capital asset. The caveat for availing this exemption is that the taxpayer must reinvest the proceeds from the sale into subscription for equity shares of an eligible company.

Exemption under Section 54GB

Individuals and Hindu Undivided Families (HUFs) seeking to mitigate Capital Gains Tax obligations can explore the provisions of Section 54F of the Income Tax Act. To qualify for this exemption, taxpayers must meet specific criteria:

1. Eligibility: Only individuals or HUFs are eligible for this exemption. Companies, LLPs, or firms cannot avail of this benefit.
2. Nature of Asset: The asset being sold must qualify as a Long Term Capital Asset (LTCA). It should be a residential property, either a house or a plot of land.
3. Utilization of Proceeds: The taxpayer must utilize the net consideration from the sale to subscribe to equity shares of an eligible company.
4. Timely Utilization: The net consideration must be utilized for subscription before the due date of filing the Income Tax Return under Section 139(1).
5. Utilization by Eligible Company: The eligible company must utilize the funds received for the purchase of new assets within one year from the date of subscription.

Taxpayers can claim this exemption while filing their Income Tax Returns for the relevant financial year. They need to use ITR-2 on the income tax website and ensure submission before the due date of 31st July.

Meaning of Terms: Eligible Company and New Asset

An “eligible company” under Section 54GB of the Income Tax Act must fulfill specific criteria:

1. Incorporation: The company must be incorporated in India.
2. Timing of Incorporation: The company should be incorporated during the previous year in which the taxpayer earns capital gains up to the subsequent financial year’s due date for furnishing of Income Tax Returns (ITR).
3. Business Activity: The company must be engaged in the business of manufacturing an article or a thing.
4. Shareholding/Voting Rights: The taxpayer must hold more than 50% of the share capital or voting rights in the company after investing in the subscription of its equity shares.
5. Classification: The company should either be classified as a medium or small enterprise under the Micro, Small and Medium Enterprises Act, 2006, or it should be an eligible start-up.

As for the definition of “new asset,” it refers to new plant and machinery but excludes certain items:

1. Plant or machinery installed in any office premises or residential accommodation.
2. Plant or machinery previously used by any other person within or outside India.
3. Any vehicle or office appliances, including computers or computer software. However, in the case of an eligible startup, computers or computer software are included.
4. Plant or machinery for which the actual cost is allowed as a deduction in computing the income under the Profit and Gain from Business or Profession (PGBP).

Quantum of exemption under Section 54GB

In the case of Ajay, who sold a residential property in FY 2021-22 for Rs. 70,00,000 (purchased in FY 2016-17 for Rs. 20,00,000) and invested Rs. 55,00,000 in equity shares of an eligible company, the deduction under Section 54GB can be calculated as follows:

Capital Gains = Sale Consideration – Cost of Acquisition = Rs. 70,00,000 – Rs. 20,00,000 = Rs. 50,00,000

Exemption = (Cost of New Asset x Capital Gains) / Net Consideration

Now, Net Consideration = Total Consideration – Cost of New Asset = Rs. 70,00,000 – Rs. 55,00,000 = Rs. 15,00,000

Therefore, the exemption under Section 54GB for Ajay would be:

Exemption = (Rs. 55,00,000 x Rs. 50,00,000) / Rs. 15,00,000 = Rs. 1,83,33,333 (approximately)

Since the maximum exemption is up to the Capital Gains, Ajay will be eligible for an exemption of Rs. 50,00,000, which is equal to the amount of Capital Gains.

Particulars	Amount
Sales Consideration	70,00,000
Less: Index Cost of Acquisition (20,00,000*317/264)	(24,01,515)
Long Term Capital Gains	45,98,485
New House Property Purchase Price	55,00,000
Section 54F Exemption Amount (35,00,000*7,77,500/15,00,000) = 18,14,167 or 7,77,500	45,98,485

Consequences of Transfer of the equity shares

The consequences of transferring equity shares and new assets under Section 54GB of the Income Tax Act are contingent upon the duration of ownership:

Situation 1: Sale of shares and new assets before 5 years If either the taxpayer or the company sells the equity shares or the new assets within 5 years of acquisition, the exemption granted under Section 54GB will be revoked. The previously availed exemption amount will become taxable in the year of sale.

Situation 2: Sale of shares and new assets after 5 years In case the equity shares or the new assets are sold after 5 years from the date of acquisition, the exemption under Section 54GB remains intact. However, the taxpayer can claim the index cost of acquisition for calculating capital gains tax on the sale of equity shares. The capital gains will then be taxed at a rate of 20%.

CGAS Scheme for claiming exemption under Section 54GB

Under Section 54GB, taxpayers have the option to utilize the Capital Gains Account Scheme (CGAS) to avail of the exemption. If a taxpayer cannot invest the entire or partial sale proceeds in equity shares of an eligible company by the deadline for filing the Income Tax Return (ITR), they must deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). This allows them to claim exemption on the amount spent on purchasing equity shares as well as the amount deposited in CGAS.

However, it’s crucial to understand that if the taxpayer fails to utilize the funds deposited in the Capital Gains Account Scheme within the stipulated one-year period, it will be taxable as income in the last year.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/