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Introduction

Where an assessee transfers a capital asset to another person, the transaction will attract capital gains in the financial year in which the asset is transferred. Based on the period for which the capital asset is held/owned by the assessee, the resultant capital gain will be taxed as short-term capital gain or long-term capital gains.

The basic premise with capital gains taxation is that it is taxation of sale of an asset – in other words, a taxation of a capital receipt.

The Income Tax Act is considerate enough to provide exemptions from capital gains either wholly or proportionately. A summary of such exemptions is given in the following paragraphs and the relevant conditions are also. Exemptions under section 54D, 54G, 54GA and 54GB are not considered in this article.

Exemptions From Capital Gains

Section 54: Investment in residential property

  • The asset transferred must be a long-term capital asset being a residential house property.
  • The assessee must be an individual / HUF.
  • The residential property should have been assessed to tax under ‘Income from house property’
  • Assessee can claim exemption for investment made in 2 house properties maximum, in case LTCG does not exceed Rs.2 crores.
  • The assessee must (a) purchase the new house property within 1 year before or 2 years from the date of transfer, or (b) construct the new property within 3 years from the date of transfer.
  • Assessee can opt to invest in Capital Gains Accounts Scheme before the date of filing ITR and utilize for purchase or construction within specified time limit.
  • Quantum of exemption = lower of, amount invested (or) LTCG.
  • If assessee sells the property within the specified time limit of 2 or 3 years, the exemption shall be withdrawn in year of transfer. Cost of acquisition shall be reduced by the quantum of exemption allowed.

Section 54F: Investment in residential property

  • The main difference between S.54 and S.54F is that for the purpose of S.54F, the asset transferred must be a LTCA other than residential house property.
  • The assessee must be an individual / HUF.
  • The assessee shall not own more than 1 residential house property as at date of transfer.
  • The assessee must (a) purchase the new house property within 1 year before or 2 years from the date of transfer, or (b) construct the new property within 3 years from the date of transfer.
  • Assessee should not (a) purchase any other residential house within 2 years from date of transfer of original asset (or) construct any other residential house within 3 years, from date of transfer of original asset
  • Assessee can opt to invest in Capital Gains Accounts Scheme before the date of filing ITR and utilize for purchase or construction within specified time limit.
  • Quantum of exemption
    • If cost of new asset >= net sale consideration à entire capital gains
    • If cost of new asset < net sale consideration à proportionate capital gain*

* Proportionate capital gain = LTCG x cost of new asset/net sale consideration

  • Assessee has option to invest in Capital Gains accounts scheme before the date of filing ITR and utilize for purchase within specified time limit.

Section 54EC: Investment in notified bonds

  • The Asset transferred must be a long term capital asset being land or building or both
  • Exemption is available for any assessee.
  • The long term capital gain must be invested in notified bonds of Rural electrification bond or National Highways Authority of India.
  • The investment must be made within 6 months from the date of transfer.
  • The assessee should not transfer or convert or avail any loan or advance on security of such bonds for a period of 5 years from date of acquisition of bonds.
  • The exemption shall be withdrawn in the PY in which the conditions are violated.
  • Interest earned on such bonds will be taxed u/s 56 as income from other sources.
  • Quantum of exemption – lower of, Amount invested (or) the LTCG, subject to a maximum investment cap of Rs.50 lakhs

Section 54EE: Investment in units of notified funds

  • Asset transferred must be any long term capital asset
  • Exemption is available for any assessee.
  • The long term capital gain must be invested in units of notified fund
  • The investment must be made within 6 months from the date of transfer.
  • The assessee should not transfer or convert or avail any loan or advance on security of such bonds for a period of 3 years from date of acquisition of bonds.
  • The exemption shall be withdrawn in the PY in which the conditions are violated.
  • Interest earned on such units will be taxed u/s 56 as income from other sources.
  • Quantum of exemption – lower of, Amount invested (or) the LTCG, subject to a maximum investment cap of Rs.50 lakhs
 

Section 54B: Investment in agricultural land

  • Asset transferred must be an urban agricultural land (short term/ long term)
  • Assessee must be an individual/HUF.
  • The land must be used for agricultural purposes in the immediately preceding 2 financial years.
  • Assessee must purchase another agricultural land (can be rural/urban) within 2 years from the date of transfer.
  • Quantum of exemption – lower of, cost of new agricultural land (or) the capital gain
  • Exemption will be withdrawn if assessee sells the asset within the next 3 years - Cost of acquisition shall be reduced by the quantum of exemption allowed.
  • The main point to note is unlike sections 54, 54F, 54EC/EE, there is no mandate for the asset transferred to be a long term capital asset – Turns out this is the only exemption available for a short term capital gain.

Can I claim exemption under multiple sections?

Let us assume a situation where an assessee wants to claim exemption under sections 54 and 54EC / 54EC and 54F. Various judicial pronouncements have iterated that assessee can claim exemption under multiple sections as long as the conditions specified in the respective sections are satisfied and there is nothing that may come in the way of the assessee to deny such an exercise.

 

Other Exemptions from Capital Gains

Following are the exemptions available in respect of capital gains other than those under section 54 which will be discussed as a part of another article:

  • Income arising from transfer of capital asset being unit of US 64 of UTI [Section 10(33)]
  • Any amount received on account of buyback of shares [Section 10(34A)]
  • Income received by individual or HUF on compulsory acquisition of urban agricultural land (used for agricultural purposes in preceding two years) whose consideration is determined or approved by Central Government or RBI. [Section 10(37)]
  • Any amount received on account of acquisition of capital asset under Land Pooling scheme, 2015 in the state of A.P. [Section 10(37A)]
  • Any amount received by a senior citizen as loan (in lumpsum or installments) under reverse mortgage [Section 10(43)]
  • Any Compensation received on account of award or agreement under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 [RFCTLARR Act, 2013].

Disclaimer: This article is aimed at introducing the list of exemptions available for a person who is transferring capital asset. The user is requested to consult a tax professional/independent accounting professional and plan using the best possible manner. The provisions are extracted from my soon-to-be-published book on income tax - ‘Compiler on Income Tax for CA/CMA Inter, CS Executive’

The author is a self-driven active professional. Active in the field of practice and education, he has a unique student friendly style of delivering classes. With immense experience and knowledge as a professional learning from him will make a student motivated.

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Published by

Mrudula M,Co-founder-KaizenEdu
(Entrepreneur, Educator )
Category Income Tax   Report

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