Introduction
Capital Gains arises on sale of a capital assets. The gain value arises when the sale consideration is higher than the cost of acquisition.
There are two types of capital gains i.e Short term capital gains and Long term capital gains.
Capital assets means
(a) property of any kind held by an Assessee.
(b) any securities held by:
(i)a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992); or
(ii)an investment fund specified in clause (a) of Explanation 1 to section 115UB which has invested such securities in accordance with the provisions of the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or under the International Financial Services Centres Authority Act, 2019 (50 of 2019);
(c) any unit linked insurance policy to which exemptions under section 10 shall not apply.
What are short term capital assets and capital gains?
Short term capital asset means a capital asset which is held for less than 24 months on the date of sale/transfer.
However, in the case of a security which is being listed in a recognised stock exchange or a unit of the Unit Trust of India or a equity oriented fund or a zero coupon bond if it is held for less than 12 months before the date of sale/transfer is termed as short-term capital asset.
Short term capital gains means capital gains arising on sale or transfer of short term capital assets.
What are long term capital assets and capital gains?
Long term capital assets are those assets which are held for a period of more than 24 months on the date of sale/transfer.
In the case of a security which is being listed in a recognised stock exchange or a unit of the Unit Trust of India or a equity oriented fund or a zero coupon bond if it is held for more than 12 months before the date of sale/transfer is termed as long-term capital asset.
Exemptions available for Capital Gains
Section 54 of the Income Tax Act 1961 provides the exemptions available for capital gains
Section 54 – Profit on sale of property used for residence
| Eligible Assessees | Individuals/ HUF |
| Asset to be transferred | Buildings (being a Residential Building) or land (should be a long term capital asset) |
| New Asset to be Acquired | Residential Property. |
| Time limit for Investment in new asset | Residential House to be: ♦Purchased within a period of one year or two years after the date of sale/transfer; or ♦ Constructed within a period of three years from the date of sale/transfer. |
| Lock-in period | Asset should not be transferred within three years from the date of purchase. |
| Eligible Amount | ♦ If capital gain < cost of the new asset = capital gain amount ♦ If capital gain > cost of the new asset = cost of the new asset |
| Additional Eligibility | If the value of the capital gain is less than “Two crores”, the assesse is eligible to purchase or construct “Two Residential House” instead of one. |
| Conditions to be fulfilled | ♦ If the new asset is not purchased or constructed within the time limit the capital gain amount should be deposited in a separate account (called CAGS) before the date of furnishing the Income Tax return for the said assessment year. ♦ The amount not utilised within the time limit will become income after a period of three years from the date of transfer of the original asset. ♦ The amount in the CAGS account can be withdrawn. |
Example :
Mr. X sold a residential property in June 2024 for ₹1.25 crore. The indexed cost of acquisition is ₹ 52 lakhs resulting in a capital gain of ₹ 73 lakhs. Now he has purchased another property for ₹ 75 lakhs within the prescribed time limit.
In this case the eligible exemption amount is ₹ 73 lakhs.
Section 54B – Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases
| Eligible Assessees | Individuals/ HUF |
| Asset to be transferred | Agricultural land used either by the Individual or the parents the Individual or the Hindu undivided family (HUF) two years before transfer. |
| New Asset to be Acquired | Agricultural land |
| Time limit for Investment in new asset | To purchase an agricultural land within a period of two years |
| Lock-in period | Asset should not be transferred within three years from the date of purchase. |
| Eligible Amount | ♦ If capital gain < cost of the new asset = capital gain amount ♦ If capital gain > cost of the new asset = cost of the new asset |
| Conditions to be fulfilled | ♦ If the new asset is not purchased or constructed within the time limit the capital gain amount should be deposited in a separate account (called CAGS) before the date of furnishing the Income Tax return for the said assessment year. ♦ The amount not utilised within the time limit will become income after a period of three years from the date of transfer of the original asset. ♦ The amount in the CAGS account can be withdrawn. |
Example:
Mr. Y a resident Individual sold his agricultural land for ₹ 50 lakh in June 2024. The land was in his name and used by his parents for agricultural purposes in the last two years before sale. The indexed cost of acquisition is ₹ 28 lakh, resulting in a capital gain of ₹ 22 lakh.
He purchased another agricultural land in February 2025 for ₹ 20 lakh.
In this case, the eligible exemption amount is ₹ 20 lakhs and the taxable capital gains is ₹ 2 lakhs.
Section 54D – Capital gain on compulsory acquisition of lands and buildings not to be charged in certain cases
| Eligible Assessees | Any Person (Individual/ HUF/Firm/Company) |
| Asset to be transferred | ♦ Land or Building or both used by the assessee for the purpose of an industrial undertaking ♦ Asset to be transferred by way of compulsory acquisition |
| New Asset to be Acquired | Purchased or constructed Land or Building for the purposes of shifting or re-establishing the said undertaking or setting up another industrial undertaking |
| Time limit for Investment in new asset | Within a period of three years from the date of transfer |
| Lock-in period | Asset should not be transferred within three years from the date of purchase. |
| Eligible Amount | ♦ If capital gain < cost of the new asset = capital gain amount ♦ If capital gain > cost of the new asset = cost of the new asset |
| Conditions to be fulfilled | ♦ If the new asset is not purchased or constructed within the time limit the capital gain amount should be deposited in a separate account (called CAGS) before the date of furnishing the Income Tax return for the said assessment year. ♦ The amount not utilised within the time limit will become income after a period of three years from the date of transfer of the original asset. ♦ The amount in the CAGS account can be withdrawn. |
Example :
Section 54EC – Capital gain not to be charged on investment in certain bonds
| Eligible Assessees | Any Person (Individual/ HUF/Firm/Company) |
| Asset to be transferred | Land or Building or Both |
| New Asset to be Acquired | Investment to be made in bonds issued by National Highways Authority of India (NHAI) or Rural Electrification Corporation Limited (RECL) |
| Time limit for Investment in new asset | within a period of 6 months after the date of transfer |
| Lock-in period | Asset should not be transferred within a period of five years from the date of investment. |
| Eligible Amount | ♦ If capital gain < Investment amount = capital gain amount ♦ If capital gain > Investment amount = ₹ 50 lakhs |
Example :
Mr. X sold a commercial building for ₹ 1.20 crore in June 2024. The indexed cost of acquisition is ₹ 50 lakhs, resulting in a capital gain of ₹ 70 lakhs.
He invests ₹ 60 lakhs in REC Bonds in November 2024 (i.e within a period of 6 months).
In this case , the eligible exemption amount is ₹ 50 lakhs and the taxable capital gain is ₹ 20 lakhs.
Section 54EE – Capital gain not to be charged on investment in units of a specified fund
| Eligible Assessees | Any Person (Individual/ HUF/Firm/Company) |
| Asset to be transferred | Any long term capital asset (i.e land or building, shares or securities etc.) |
| New Asset to be Acquired | Investment to be made in notified specified funds |
| Time limit for Investment in new asset | within a period of 6 months after the date of transfer |
| Lock-in period | Asset should not be transferred within three years from the date of purchase. |
| Eligible Amount | ♦ If capital gain < Investment amount = capital gain amount ♦ If capital gain > Investment amount = Investment amount |
Section 54F – Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house
| Eligible Assessees | Individuals/ HUF |
| Asset to be transferred | Long-term capital asset other than Residential Property |
| New Asset to be Acquired | Residential Property. |
| Time limit for Investment in new asset | Residential House to be: ♦Purchased within a period of one year or two years after the date of sale/transfer; or ♦ Constructed within a period of three years from the date of sale/transfer. |
| Lock-in period | Three years |
| Eligible Amount | ♦ If capital gain < cost of the new asset = cost of the new asset ♦ If capital gain > cost of the new asset = (Amount invested / Net sale consideration) × Capital gain |
| Conditions to be fulfilled | ♦The assessee should not : ♣ owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or ♣ purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or ♣ constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; |
Example :
Mr. A sold a plot of vacant land in June 2024 for ₹ 100 lakhs. The indexed cost of acquisition is ₹ 40 lakhs, resulting in a capital gain of ₹ 60 lakhs.
He does not own any other residential house on the date of transfer. He purchases a new residential house on 12th February 2025 for ₹ 50 lakhs (i.e within 1 year after transfer).
In this case the eligible amount of exemption has to be calculated using the formula since the cost of the new asset is less than the capital gain amount.
Exemption = (Amount invested / Net sale consideration) × Capital gain
Exemption amount = (₹ 50 lakhs/₹ 100 lakhs) x ₹ 60 lakhs = 30 lakhs.
Section 54G – Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area
| Eligible Assessees | Any Person (Individual/ HUF/Firm/Company) |
| Asset to be transferred | Machinery or plant or building or land or any rights in building or land used for the purposes of the business of an industrial undertaking situated in an urban area |
| New Asset to be Acquired | ♦ Purchase new machinery or plant for the purposes of business of the industrial undertaking in the area to which the said undertaking is shifted; ♦ Acquired building or land or constructed building for the purposes of his business in the said area; ♦ shifted the original asset and transferred the establishment of such undertaking to such area; and ♦ incurred expenses on such other purpose as may be specified in a scheme framed by the Central Government for the purposes of this section |
| Time limit for Investment in new asset | Within a period of one year before or three years after the date the transfer took place. |
| Eligible Amount | ♦ If capital gain < cost of the asset = capital gain amount ♦ If capital gain > cost of the asset = cost of the asset |
| Conditions to be fulfilled | ♦ If the new asset is not purchased or constructed within the time limit the capital gain amount should be deposited in a separate account (called CAGS) before the date of furnishing the Income Tax return for the said assessment year. ♦ The amount not utilised within the time limit will become income after a period of three years from the date of transfer of the original asset. ♦ The amount in the CAGS account can be withdrawn. |
Meaning of Urban area :
Urban area means any such area within the limits of a municipal corporation or municipality as the Central Government may, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, by general or special order, declare to be an urban area.
Example :
XYZ Ltd. shifts its factory from a notified urban area to a non-urban area in 2024. It sells land and building for ₹ 2.00 crore, with a capital gain of ₹ 60 lakh. It incurs the following expenses for shifting and re-establishment:
- New building in the new area: ₹ 40 lakh
- New machinery: ₹ 15 lakh
- Shifting and installation costs: ₹ 5 lakh
- Total Investment: ₹ 60 lakh
Exemption under Section 54G = ₹ 60 lakh (being the amount invested which is equal to the capital gain).
Section 54GA – Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone
| Eligible Assessees | Any Person (Individual/ HUF/Firm/Company) |
| Asset to be transferred | Machinery or plant or building or land or any rights in building or land used for the purposes of the business of an industrial undertaking situated in an urban area |
| New Asset to be Acquired | ♦ Purchased machinery or plant for the purposes of business of the industrial undertaking in the Special Economic Zone to which the said undertaking is shifted; ♦ Acquired building or land or constructed building for the purposes of his business in the Special Economic Zone; ♦ Shifted the original asset and transferred the establishment of such undertaking to the Special Economic Zone; and ♦ Incurred expenses on such other purposes as may be specified in a scheme framed by the Central Government for the purposes of this section, |
| Time limit for Investment in new asset | Within a period of one year before or three years after the date the transfer took place. |
| Eligible Amount | ♦ If capital gain < cost of the asset = capital gain amount ♦ If capital gain > cost of the asset = cost of the asset |
| Conditions to be fulfilled | ♦ If the new asset is not purchased or constructed within the time limit the capital gain amount should be deposited in a separate account (called CAGS) before the date of furnishing the Income Tax return for the said assessment year. ♦ The amount not utilised within the time limit will become income after a period of three years from the date of transfer of the original asset. ♦ The amount in the CAGS account can be withdrawn. |
Section 54GB – Capital gain on transfer of residential property not to be charged in certain cases
| Eligible Assessees | Individual/ HUF |
| Asset to be transferred | Residential Property |
| New Asset to be Acquired | Investment in equity shares of a eligible company and the company within a period of 1 year from the date of subscription in equity shares by the assessee, utilised the amount for purchase of new asset. ** Eligible Company means: ♦ a company incorporated in India on the 1st day of April relevant to the assessment year for which the return is being filed; ♦ engaged in the business of manufacture of an article or a thing or in an eligible business; ♦ a company in which the assessee has more than 25% share capital or more than 25% voting rights after the subscription in shares by the assessee; and ♦ a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 or an eligible start-up. |
| Time limit for Investment in new asset | Investment to be made before the due date for furnishing the Income Tax return |
| Lock-in period | 5 years |
| Eligible Amount | ♦ If capital gain < cost of the asset = capital gain amount ♦ If capital gain > cost of the asset = Proportionate Exemption |
| Conditions to be fulfilled | ♦ If the new asset is not purchased or constructed within the time limit the capital gain amount should be deposited in a separate account (called CAGS) before the date of furnishing the Income Tax return for the said assessment year. ♦ The amount not utilised within the time limit will become income after a period of three years from the date of transfer of the original asset. ♦ The amount in the CAGS account can be withdrawn. |
** Proportionate Exemption = Capital Gain x (Amount used for purchase of asset / Net consideration invested)
Example :
Mr. X sells a residential plot on 14th June 2024 for ₹ 90 lakh. The indexed cost of acquisition is ₹ 40 lakh, resulting in a capital gain of ₹ 50 lakh.
He invests ₹ 75 lakh in equity shares of an eligible startup company before the due date of filing return.
The company uses ₹ 60 lakh (out of ₹ 75 lakh) to buy new plant and machinery.
Eligible Exemption amount = ₹ 50 lakh (since the gain amount is less than the investment amount)
If the company had used only ₹ 35 lakh out of ₹ 75 lakh for new plant and machinery, then:
Proportionate exemption would be = ₹ 50 lakh x (₹ 35 lakh / ₹ 75 lakh) = ₹ 23.30 lakh and
Taxable capital gain = ₹ 26.70 lakh
Conclusion
Capital Gain exemptions allows assessees to reduce or eliminate tax liability on the gains arising on transfer of capital assets. It is important to check the eligibility before claiming exemption and is also important to adhere with the time limits specified each section.
Note : Indexation benefit on Long Term capital Gains have been removed vide Finance (no.2) Act 2024. The long term capital gains will be the difference of the cost of consideration on transfer of the asset less than the cost of acquisition.
