Capital Gains Exemption
Important Keyword: Capital Gains Exemption, Income Heads, Income Tax.
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Capital Gains Exemption
When individuals part ways with their assets, the looming prospect of capital gains tax on the accrued profits becomes inevitable. However, the tax rates levied on these gains vary contingent upon the duration of asset ownership—classified as either short-term or long-term. To foster investment in assets poised for long-term growth and alleviate tax burdens, the Income Tax Act extends a lifeline in the form of specific exemption provisions.
Outlined under section 54, these Capital Gains Exemptions serve as beacons of tax relief, illuminating the path for taxpayers seeking refuge from hefty tax liabilities during the Income Tax Return filing process. By leveraging these exemptions, individuals can navigate the labyrinth of tax regulations, capitalize on opportunities for tax savings, and embark on a journey towards financial well-being.
What is Capital Gains Exemption?
Section 54 of the Income Tax Act serves as a beacon of hope for taxpayers, offering them a chance to circumvent capital gain taxes on profits arising from the sale of specific assets. This provision allows individuals to potentially sidestep tax obligations by reinvesting their gains in eligible assets outlined within the section. By adhering to the stipulated timeframe for reinvestment, taxpayers can seek partial or complete exemption on their capital gains, providing them with a significant tax relief opportunity.
However, it’s crucial to exercise caution, as these exemptions are subject to certain limitations. Taxpayers must ensure that the claimed exemptions do not surpass the total amount of capital gains realized from the sale of the assets.
List of Capital Gains Exemption
| Section | Description | Applicability | Deduction Amount |
| 54 | Long-Term Capital Gains on Sale of Residential House Property by Individual/HUF | – Purchase or Construction of Residential House Property – Purchased 1 year before or 2 years after the sale of a property – Constructed within 3 years of the sale of a property | Lower of Cost of New House Property OR Capital Gains |
| 54F | Sale of Long Term Capital Asset (LTCA) other than house property by Individual/HUF | – Purchase/Construction of New House Property – Purchased 1 year before or 2 years after the sale of a property – Constructed within 3 years of the sale of a property | Cost of new asset * Capital Gains / Net Consideration |
| 54EC | Sale of long-term Land or Building or both by any taxpayer | – Investment in NHAI/REC Bonds – An investment made within 6 months of the sale of an asset – The investment amount can not be more than Rs. 50 lakhs | Lower of Cost of Investment OR Capital Gains |
| 54B | Sale of long-term or short-term Agricultural Land by Individual/HUF | – Purchase of new Agricultural Land – Purchased within 2 years from the sale of land – Land sold must be used for agriculture purposes for 2 years before sale | Lower of Cost of New Agricultural Land OR Capital Gains |
| 54D | Compulsory acquisition of long-term land and buildings used in an industrial undertaking | – Purchase of land or building for shifting or re-establishing the industrial undertaking – Purchase within 3 years from the date of receipt of compensation – Land/Building acquired must be used for industrial undertaking purposes for 2 years before the transfer | Lower of Cost of New Asset OR Capital Gains |
| 54E, 54EA, 54EB | Sale of any long-term capital asset by any taxpayer | – Investment in Specified Securities – Specified securities include Government Securities, Savings Certificates, Units of UTI, Specified Debentures, etc – An investment made within 6 months of the sale of an asset | Cost of new asset * Capital Gains / Net Consideration |
| 54EE | Sale of any long-term capital asset by any taxpayer | – Investment in units of a notified fund to finance startups – The investment amount can not be more than Rs. 50 lakhs – An investment made within 6 months of the sale of an asset | Lower of Cost of Investment OR Capital Gains |
| 54G | Sale of plant, machinery, land, and buildings to shift industrial undertaking from urban area to rural area | – Purchase of new plant, machinery, land, building to shift industrial undertaking to rural area – Purchased within 1 year before and 3 years after the sale of assets – The asset sold can be LTCA or STCA | Lower of Cost of New Asset OR Capital Gains |
| 54GA | Sale of plant, machinery, land, and buildings to shift industrial undertaking from urban area to rural area | – Purchase of new plant, machinery, land, and building to shift industrial undertaking to SEZ – Purchased within 1 year before and 3 years after the sale of assets – The asset sold can be LTCA or STCA | Lower of Cost of New Asset OR Capital Gains |
| 54GB | Sale of long-term residential house property or residential plot of land by individual or HUF | – Subscription in equity shares of eligible company or startup – Eligible companies or startups should utilize the amount of subscription for the purchase of new assets | Cost of new asset * Capital Gains / Net Consideration |
Key features to keep in mind while claiming an exemption.
Section 54F
Under Section 54F of the Income Tax Act, certain conditions must be met to qualify for capital gains tax exemption. Firstly, at the time of transferring a long-term capital asset (LTCA), the taxpayer should not possess more than one residential house. Additionally, within two years from the transfer date, the taxpayer should neither purchase another house nor commence construction on one within three years. Failure to comply with these conditions will result in the exempted capital gains becoming taxable in the year when the new residential property is acquired or constructed.
Section 54EC
As per Section 54EC, if a taxpayer obtains a loan or advance against the security of bonds or units, the amount will be considered converted into money on the date of loan acquisition, and any previously exempted capital gains will become taxable. Moreover, if the long-term capital gain does not exceed two crores, the taxpayer can invest in up to two residential properties within the specified time limit. However, this provision allowing the acquisition of two properties is applicable only once in a taxpayer’s lifetime.
Capital Gains Account Scheme
The Capital Gains Account Scheme (CGAS) serves as a valuable tool for taxpayers seeking to avail themselves of capital gains exemptions. Through CGAS, individuals can temporarily hold funds and invest them in specified assets to reduce their capital gains tax burden. In cases where investors are unable to make the necessary investments before the deadline for filing their Income Tax Returns (ITR), depositing funds into a CGAS account becomes imperative to qualify for the exemption. This scheme is applicable across various sections of the Income Tax Act, including Sections 54, 54B, 54D, 54EE, 54F, 54G, 54GA, and 54GB.
Reporting Exemption in ITR
When completing their ITR, taxpayers must meticulously detail their investments in specific sections to claim capital gains exemptions successfully. Additionally, if individuals have temporarily deposited their gains in a CGAS account, it is crucial to include these particulars in their ITR filing to ensure compliance with tax regulations.
Here are the steps to disclose the capital gains exemption while filing an ITR
Navigate to the Schedule Capital Gains
Select the relevant income sources related to capital gains. On the subsequent screen, navigate to Option D – Information about Deductions Claimed Against Capital Gains.
Click on the “Add Details” button to provide the necessary information regarding the deductions claimed against your capital gains.
Add the Section of deduction claimed
After clicking on “Add Details,” you will encounter a drop-down menu prompting you to select the specific section of capital gain deduction.
From the drop-down menu, choose the appropriate section under which you are claiming the deduction. This selection should align with the relevant section of the Income Tax Act that allows for the deduction you are claiming.
Enter the details of the amount invested
Once you’ve selected the appropriate section, proceed by entering the required details of the investment.
For instance, if you’ve invested long-term gains from any asset into residential property, you would report it under section 54F. Enter the relevant details such as the amount invested, date of investment, and any other required information pertaining to the investment made under that section.
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