Introduction to Section 54 Exemption
Part 1
The Income Tax Act, 1961, provides various exemptions for taxpayers to mitigate the impact of capital gains tax, especially when proceeds from the sale of a property are reinvested in acquiring another property. Section 54 and its related sections offer significant relief to taxpayers by allowing them to claim exemptions if they reinvest the gains in residential properties or agricultural land.
This FAQ series will provide you with a comprehensive understanding of the provisions and conditions under Section 54, Section 54B, Section 54D, and Section 54EC. These sections are designed to help individuals and Hindu Undivided Families (HUFs) navigate through capital gains exemptions and ensure compliance with the required investment timelines. In this first part, we will address the most common queries related to these sections and their benefits.
Key Topics Covered in Part 1:
✅ Section 54 – Exemption on capital gains arising from the transfer of a residential property.
✅ Section 54B – Exemption for capital gains arising from the transfer of agricultural land.
✅ Section 54D – Exemption on compulsory acquisition of land/building used for industrial purposes.
✅ Section 54EC – Exemption for reinvestment of capital gains in bonds issued by NHAI or REC.
Section 54 FAQS:
1. What is Section 54 of the Income Tax Act, 1961, and who can claim exemption under it?
Section 54 of the Income Tax Act, 1961, provides an exemption from capital gains tax on the transfer of a long-term capital asset, specifically a residential house property. The exemption is granted if the capital gains are reinvested in the purchase or construction of another residential property within the stipulated timelines.
The exemption under Section 54 is available only to individuals and Hindu Undivided Families (HUFs). Other taxpayers, such as companies or firms, are not eligible for this benefit
2. What type of capital asset qualifies for exemption under Section 54 of the Income Tax Act, 1961?
The exemption under Section 54 is applicable only if the capital gain arises from the transfer of a long-term capital asset, which is defined as:
- A residential house property or land appurtenant to it.
- The property must qualify as a long-term capital asset, meaning it has been held for a period exceeding 24 months immediately prior to the date of transfer.
This ensures that only immovable properties, such as land, buildings, or both, held for more than two(2) years, are eligible for the benefit.
3. What type of new asset must be acquired to claim exemption under Section 54?
To claim exemption under Section 54, the capital gain must be reinvested in:
- The purchase or construction of a residential house property.
- The newly acquired property must be situated in India to qualify for the exemption.
This provision emphasizes reinvestment within the country, and adherence to this condition is mandatory to retain the benefit under Section 54.Â
4. What is the maximum exemption amount under Section 54 of the Income Tax Act, 1961?
The maximum exemption allowed under Section 54 will be the lower of the following amounts:
- The amount of long-term capital gains; or
- ₹10 crores (introduced by the Finance Act, 2023, applicable from Assessment Year 2024-25 onwards); or
- The aggregate of the amount invested in the purchase or construction of a new residential house property and the amount deposited in the Capital Gain Account Scheme.
Note:
If the total investment in the new house property and the deposit in the Capital Gain Account Scheme exceeds ₹10 crores, the threshold limit is adjusted as follows:
- The limit is first applied to the investment in the new residential house property.
- If the investment in the new house property is less than ₹10 crores, the remaining balance will be adjusted against the amount deposited in the Capital Gain Account Scheme.
5. Is there a limit on the number of house properties eligible for exemption under Section 54?
Yes, as per the provisions of Section 54:
- The exemption is generally available for the investment made in one residential house property.
- However, from Assessment Year 2020-21 onwards, if the amount of long-term capital gains does not exceed ₹2 crores, the taxpayer can claim the exemption for the purchase or construction of two residential house properties.
Important Condition:
This option to claim exemption for two residential properties can be exercised only once in a lifetime. Once availed, the benefit cannot be claimed for any subsequent financial years.
6. What is the time limit for making an investment in a new residential property under Section 54?
To claim exemption under Section 54, the taxpayer must adhere to the following timelines:
- For purchase: The new residential house property must be purchased within 1 year before or 2 years after the date of transfer of the original property.
- For construction: The construction of the new house must be completed within 3 years from the date of transfer of the original property.
7. What is the Capital Gains Account Scheme (CGAS) under the Income Tax Act, 1961, and what is the time limit for depositing unutilized capital gains?
Capital Gains Account Scheme (CGAS):
The Capital Gains Account Scheme (CGAS) is a special-purpose facility offered by authorized banks, enabling taxpayers to temporarily park their unutilized capital gains. This scheme allows taxpayers to claim exemption under Section 54 (or other relevant sections) if they have not utilized the capital gains for purchasing or constructing a residential house property before the due date of filing their income tax return.
By depositing the unutilized capital gains in a Capital Gains Account, the taxpayer safeguards their eligibility for exemption, provided the deposited amount is later used for the intended purpose within the specified timelines.
Time Limit for Depositing Unutilized Amounts:
- If the capital gains arising from the transfer of a residential property are not fully utilized (either wholly or partially) for the purchase or construction of another house before the due date of filing the income tax return, the taxpayer must deposit the unutilized amount into a CGAS account by the due date of filing the return (under Section 139(1) of the Income Tax Act).
- The amount deposited in the CGAS must subsequently be utilized within the prescribed time limits:
- 2 years for the purchase of a new residential house property.
- 3 years for the construction of a new residential house property.
Important Note:
If the deposited amount is not utilized within the specified period, the unutilized balance in the CGAS account will be treated as capital gains in the year of expiry of the timeline and taxed accordingly.
8. Under what circumstances can the exemption under Section 54 of the Income Tax Act, 1961, be withdrawn?
The exemption under Section 54 may be withdrawn in the following circumstances:
(a) Non-utilization of the amount deposited in the Capital Gains Account Scheme (CGAS):
- If the amount deposited in the CGAS is not utilized for purchasing a residential house property within 2 years or constructing a residential house property within 3 years from the date of transfer of the original asset, the unutilized amount in the CGAS will be treated as long-term capital gains in the year in which the prescribed time limit expires.
- Such unutilized amounts will then become taxable as per the applicable provisions of the Income Tax Act.
(b) Transfer of the new house within 3 years:
- If the new residential house property, purchased or constructed to claim exemption under Section 54, is sold or transferred within 3 years from the date of its purchase or completion of construction, the exemption will be reversed.
- At the time of computing the capital gains on the sale of the new house, the amount of capital gains previously claimed as exempt under Section 54 will be deducted from the cost of acquisition of the new house. This increases the taxable capital gains arising from the sale of the new property.
9. What happens to the unutilized amount in the Capital Gains Account Scheme if the taxpayer passes away?
As clarified by the Central Board of Direct Taxes (CBDT) through Circular No. 743, dated May 6, 1996:
- If the taxpayer (individual) passes away before utilizing the amount deposited in the CGAS within the prescribed time frame, the unutilized amount does not become taxable.
- The unutilized deposit is not treated as the income of the deceased taxpayer and is not taxable in the hands of the legal heirs.
- Since the unutilized deposit does not partake the character of income in the hands of the legal heirs, it is treated as part of the inheritance or estate of the deceased and remains non-taxable.
Section 54B FAQS:
1. What is Section 54B of the Income Tax Act, 1961, and who can claim exemption under it?
Nature of Exemption under Section 54B:
Section 54B of the Income Tax Act provides an exemption from capital gains tax arising from the transfer of agricultural land. The exemption is available if the capital gains are reinvested in the purchase of new agricultural land within the prescribed time limits. The key conditions for availing this exemption are:
- The land transferred must have been used for agricultural purposes by the taxpayer or their parents for at least two years immediately preceding the date of transfer.
- The taxpayer must reinvest the capital gains in the purchase of new agricultural land within a period of 2 years from the date of transfer.
If the new agricultural land is sold or transferred within 3 years from the date of purchase, the exemption claimed earlier will be revoked, and the amount will be treated as capital gains in the year of sale.
Eligibility to Claim Exemption under Section 54B:
The exemption under Section 54B can be claimed only by:
- Individuals; or
- Hindu Undivided Families (HUFs).
Other entities, such as companies, partnerships, or trusts, are not eligible to avail of this benefit.
2. What types of capital assets qualify for exemption under Section 54B of the Income Tax Act, 1961?
Eligible Capital Asset:
To claim an exemption under Section 54B, the capital gain must arise from the transfer of agricultural land. The key conditions are:
- The agricultural land should have been used for agricultural purposes for at least 2 years immediately preceding the date of transfer.
- The usage can be by the taxpayer, their parents, or by a Hindu Undivided Family (HUF), irrespective of who owns the land.
Additional Considerations:
- The exemption is applicable whether the capital gain arises from the transfer of a long-term or short-term capital asset.
- Only urban agricultural land qualifies for this exemption. Rural agricultural land is excluded as it is not considered a “capital asset” under Section 2(14) of the Income Tax Act, and hence no capital gains tax applies to its transfer.
3. What is the nature of the new asset required to claim exemption under Section 54B?
To claim exemption under Section 54B, the capital gains from the transfer of agricultural land must be reinvested in the purchase of new agricultural land.
Key Points:
- The new agricultural land can be located in either a rural or urban
- The reinvestment must occur within 2 years from the date of transfer of the original agricultural land.
The new land must also be used for agricultural purposes to retain the exemption.
4. What is the maximum amount of exemption allowed under Section 54B?
The exemption amount under Section 54B is restricted to the lower of the following:
- The capital gains arising from the transfer of the original agricultural land; or
- The amount invested in the purchase of new agricultural land, including any amount deposited in the Capital Gains Deposit Account Scheme (CGAS).
Important Note:
If the amount deposited in the CGAS or invested in the new agricultural land is not utilized within the prescribed period, the unutilized portion will be deemed to be long-term capital gains and taxed accordingly in the year in which the prescribed period expires.
5. What is the prescribed time limit for investing in a new asset under Section 54B of the Income Tax Act, 1961?
To avail of the exemption under Section 54B, the taxpayer must invest the capital gains in purchasing new agricultural land within 2 years from the date of transfer of the original agricultural land. This timeline is crucial for maintaining the eligibility for exemption under this section.
6. Can a taxpayer claim exemption under Section 54B by depositing capital gains in the Capital Gains Account Scheme (CGAS)?
Yes, a taxpayer can avail of the exemption under Section 54B by depositing the unutilized capital gains in the Capital Gains Deposit Account Scheme (CGAS) if the capital gains are not fully utilized to purchase agricultural land by the due date of filing the return of income.
- The capital gains deposited in CGAS can be utilized to purchase new agricultural land within 2 years from the transfer of the original asset.
- If the capital gains are not utilized within the specified period, the unutilized amount will be treated as long-term capital gains and taxed accordingly in the year the timeline expires.
7. Under what circumstances can the exemption under Section 54B be withdrawn?
Exemption claimed under Section 54B can be withdrawn in the following circumstances:
(a) Transfer of New Agricultural Land within 3 Years:
- If the taxpayer sells the new agricultural land, purchased with capital gains under Section 54B, within 3 years from the date of its acquisition, the exemption granted earlier will be revoked.
- When the new agricultural land is sold within this period, the amount of capital gain previously claimed as exempt will be deducted from the cost of acquisition of the new land while calculating the capital gain arising from its transfer.
(b) Non-utilization of Amount Deposited in CGAS:
- If the capital gains deposited in the Capital Gains Deposit Account Scheme (CGAS) are not utilized for purchasing agricultural land within 2 years from the date of transfer of the original land, the unutilized amount will be treated as long-term capital gains in the relevant assessment year.
- This treatment ensures that the taxpayer is no longer entitled to the exemption under Section 54B for that year.
Section 54D FAQS:
1. What is Section 54D of the Income Tax Act, 1961, and who is eligible to claim exemption under it?
Nature of Exemption under Section 54D:
Section 54D provides an exemption from capital gains tax arising from the compulsory acquisition of land or building that forms part of an industrial undertaking. The exemption can be claimed if the amount of capital gains from the compulsory acquisition is reinvested in the purchase of another land or building.
Key points for eligibility:
- The land or building transferred must be part of an industrial undertaking.
- The capital gains must be utilized for purchasing another land or building within the prescribed time limits to avail of the exemption.
Eligibility to Claim Exemption under Section 54D:
This exemption is available to all assessees, including:
- Individuals
- Hindu Undivided Families (HUF)
- Firms
- Companies
- Other entities
2. What type of capital asset qualifies for exemption under Section 54D of the Income Tax Act, 1961?
To claim the exemption under Section 54D, the capital gains must arise from the compulsory acquisition of land or building that forms part of an industrial undertaking. For the exemption to be applicable:
- The land or building must have been used by the taxpayer in the business of the industrial undertaking for at least 2 years before the date of compulsory acquisition.
- The land or building, whether short-term or long-term, qualifies for the exemption under this section, provided it meets the criteria of being part of the industrial undertaking.
3. What new asset must be acquired to claim exemption under Section 54D?
To claim the exemption under Section 54D, the taxpayer must reinvest the capital gains in the purchase or construction of another land or building or acquire rights in any other land or building. The reinvestment must be for the purpose of:
- Shifting or re-establishing the existing industrial undertaking.
- Setting up a new industrial undertaking.
This ensures that the exemption is directly linked to the continuation or expansion of the industrial activities of the taxpayer.
4. What is the maximum exemption allowed under Section 54D of the Income Tax Act?
The maximum exemption under Section 54D is the lower of the following amounts:
- The amount of capital gains arising from the compulsory acquisition of land or building.
- The amount of investment made in purchasing a new land or building, which may include the amount deposited in the Capital Gains Account Scheme (CGAS).
This ensures that the exemption is capped either by the amount of capital gains or the amount reinvested in the new assets.
5. What is the prescribed time limit for making the investment in a new asset under Section 54D?
To claim the exemption under Section 54D, the taxpayer must make the investment in a new land or building within 3 years from the date of compulsory acquisition of the original asset. This time limit ensures that the reinvestment is made promptly to re-establish or expand the industrial undertaking.
6. Is it possible to claim exemption under Section 54D by depositing capital gains in the Capital Gains Account Scheme?
Yes, a taxpayer can claim the exemption under Section 54D by depositing the unutilized capital gains in the Capital Gains Deposit Account Scheme (CGAS). This is applicable in cases where the capital gains arising from the transfer of land or building have not been fully utilized for purchasing new land or building, or constructing a building before the date of filing the return of income.
- The unutilized capital gains must be deposited in the CGAS before the filing date.
- The new land or building must be purchased or constructed within 3 years from the date of compulsory acquisition, and the amount can be withdrawn from the CGAS within this time limit for the purpose of reinvestment.
7. Under what circumstances can the exemption under Section 54D be withdrawn?
The exemption under Section 54D may be withdrawn under the following circumstances:
(a) Transfer of the new land or building within 3 years:
- If the taxpayer sells the newly acquired or constructed land or building within 3 years from the date of its purchase or construction, the exemption claimed under Section 54D will be reversed.
- The amount of capital gains that was exempted will be deducted from the cost of acquisition of the new land or building while computing the capital gain at the time of its transfer.
(b) Unutilized amount deposited in Capital Gains Account Scheme:
- If the amount deposited in the Capital Gains Account Scheme is not utilized for the purchase or construction of new land or building within 3 years from the date of compulsory acquisition, the unutilized amount will be considered as long-term capital gains and will be taxed as income in the year when the 3-year period expires.
Section 54EC FAQS:
1. What is Section 54EC of the Income Tax Act, 1961, and who is eligible to claim exemption under it?
Section 54EC of the Income Tax Act provides an exemption on capital gains arising from the transfer of a capital asset, such as land or buildings. The taxpayer can claim this exemption if they invest the capital gains in specific bonds issued by the National Highway Authority of India (NHAI) or the Rural Electrification Corporation Limited (REC) within a prescribed period.
- The exemption is applicable to all types of assessees—whether an individual, Hindu Undivided Family (HUF), firm, or company, irrespective of their residential status during the previous year.
- The investment in these bonds must be made within 6 months from the date of transfer of the land or building.
- The exemption is subject to a maximum limit of Rs. 50 lakhs for investments in such bonds in a financial year.
2. What capital assets qualify for exemption under Section 54EC?
Exemption under Section 54EC is available on capital gains arising from the transfer of a long-term capital asset, specifically land, building, or both.
3. What new asset should be acquired to claim the exemption under Section 54EC?
The exemption under Section 54EC is granted if the capital gains are invested in bonds issued by the following entities:
- National Highway Authority of India (NHAI) Bonds
- Rural Electrification Corporation Limited (REC) Bonds
- Any other bonds notified by the Central Government
4. What is the maximum exemption amount under Section 54EC?
The exemption available under Section 54EC is the lower of the following:
- The amount of capital gains arising from the transfer of the capital asset (whether long-term or short-term),
- The amount invested in the specified bonds (NHAI/REC/other notified bonds), or
Rs. 50,00,000 (Rupees Fifty Lakhs).
5. What is the prescribed time limit for investment under Section 54EC?
To claim the exemption under Section 54EC, the capital gains must be invested in the specified bonds within 6 months from the date of transfer of the capital asset (land, building, or both).
6. Can the benefit of depositing capital gains in a Capital Gains Account Scheme be used to claim exemption under Section 54EC?
No, the benefit of depositing unutilized capital gains in the Capital Gains Account Scheme is not applicable for claiming exemption under Section 54EC.
7. Under what circumstances can the exemption under Section 54EC be withdrawn?
The exemption granted under Section 54EC may be withdrawn in the following situations:
- Transfer of Bonds within 5 years: If the bonds acquired under Section 54EC are transferred within 5 years, the previously exempted capital gains will be taxed as long-term capital gains in the year of transfer.
- Conversion of Bonds within 5 years: If the bonds are converted into cash within 5 years from the date of acquisition, the capital gains that were exempted under Section 54EC will be taxed as long-term capital gains in the year of conversion.