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capital gain exemption : How to save capital gain legally

Capital gain exemption is one of the important points to go through while selling capital asset like land, building, plot etc. So instead of choosing way of tax evasion, Learn how to save capital gain legally.

Capital gain exemptions available as per income tax act :

Here is the summary table of exemptions:

SectionCapital gainOn sale ofNew property  to claim exemption
54Long termResidential house propertyHouse property
54ECLong termAny assetNHAI or REC bonds
54FLong termAsset other than residential houseHouse property
54BLong term or short termAgricultural landAgricultural land
54DLong term or short termCompulsory acquisition of land or building used for industrial undertakingLand or building for the purpose of industrial undertaking
54GLong term or short termCapital asset used in industrial undertaking in urban areaCapital asset for use in industrial undertaking in non urban area
54GALong term or short termCapital asset used in industrial undertaking in urban areaCapital asset for use in industrial undertaking in SEZ area
54GBLong termLong term capital assetEquity shares in eligible company

 

 

Capital gain exemption u/s 54:

This exemption is available only for long term capital gain arising from sale of residential house property. Following are the important points regarding exemption u/s 54.

  1. Exemption u/s 54 is available to individual and HUF.
  2. You can save long term capital gain from residential house property by using this exemption.Long term capital gain means house should be own for 3 years or more.
  3. To avail exemption u/s 54, you need to purchase/construct residential house property within specified time. Time limit for puchase of property is 1 year before the transfer or 2 years after the date of transfer. If you do not want to purchase the property but want to go with construction, you can construct the property within 3 years after the date of transfer. Let say you sell your house on 6/6/2015. You can avail exemption u/s 54 by purchasing house between 6/6/14 to 5/6/17 OR construction house within 5/6/2018.
  4. Exemption is available for 1 house property purchase. Means if you purchase two house, you can claim exemption for purchase value of 1 house property.
  5. The property in which you have made investment should be located in India. This change is effective from the A.Y. 2015-16.
  6. Construction of house property should be completed within 3 years from the date of transfer. Construction can be started before the date of transfer or after the date of transfer. So please plan accordingly if you want to construct new house property and want to avail capital gain exemption.
  7. Another important condition is that the new house you have purchased should not be transferred within 3 years from the date of purchase or construction. If the new house is transfer before 3 years, the capital gain exempted earlier will be taxable along with capital gain arisen from the transfer of new house.

Example of calculation of capital gain exemption under section 54:

Mr. Jenil purchased house on 1/1/10 for Rs. 10,00,000. He sold the house for Rs. 22,00,000 on 31/3/14. He purchased new house on 11/7/14  for Rs. 15,00,000. He sold new house on 1/4/15 for Rs. 20,00,000.

Long term capital gain on sale of first house
Sale value22,00,000
Indexed cost of acquisition10,00,000/632*939(14,85,759)
Long term capital gain7,14,241
Less capital gain exemption u/s 54(714241)
Taxable capital gain0
Capital gain on sale of second house
Sale value20,00,000
Less cost of acquisition15,00,000 -714241(785759)
Taxable short term capital gain1214241

 

Capital gain exemption u/s 54EC:

  1. Exemption u/s 54EC is available only if you have transferred long term asset means you have possess asset for 3 years or more. Long term asset means any capital asset – residential house, plot, gold, shares etc.
  2. Any assessee can avail exemption u/s 54EC. So individual, company, AOP, BOI, LLP, firm etc. can avail the benefit and reduce tax burden.
  3. To avail the exemption, you need to invest in following bonds within 6 months from the date of transfer ( sale) of asset : NHAI bonds ( Bonds issued by National highways authority of India) or REC bonds ( Bonds issued by Rural Electrification Corporation Ltd.)
  4. You can avail maximum exemption up to Rs. 50 Lakhs from this investment. ( From AY 2015-16)
  5. You can avail exemption for transfer of one or more assets.
  6. The bonds should not be tranferred  or converted into money or advance or loan is taken on security of bonds)within 3 years from the date of purchase of bond. If the bonds are sold ( converted or advance is taken) before 3 years, the capital gain exempted earlier will be deemed to be long term capital gain in the year of transfer of bonds.

Example of calculation of capital gain under section 54EC:

Mr. Pritam sold his plot on 6/6/2014 for Rs. 8,00,000. He has purchased the plot on 1/1/2009 for Rs. 1,20,000. He has also sold gold for Rs. 5,20,000 on 8/12/2014. The gold was purchased  by him for Rs. 2,00,000 on 1/1/2006.He invested Rs. 1,00,000 in NHAI bonds on 22/1/2015.

Long term capital gain on sale of plot
Sale value8,00,0008,00,000
Less indexed cost of acquisition1,20,000*1024/582(2,11,134)
Long term capital gain5,88,866
Less exemption u/s 54ECNot available as investment is after 6 months from the date of transfer0
Taxable capital gain5,88,866
Long term capital gain on sale of gold
Sale value5,20,000
Less cost of acquisition2,00,000*1024/4974,12,072
Capital gain1,07,928
Less exemption u/s 54EC1,00,000
Taxable capital gain7,928

 

*Not available as investment is after 6 months from the date of transfer

 Capital gain exemption u/s 54F:

  1. This capital gain exemption is allowed for sale ( transfer) of long term capital asset other than house property.
  2. This exemption is available to only individual or HUF.
  3. To avail the exemption, you need to purchase a house property ( I will mention it as New house) within 1 year from the date of transfer or after 2 years from the date of transfer. or you can construct the house property within 3 years from the date of transfer. Suppose you sell plot on 8/10/2014. You can avail capital gain exemption u/s 54F by purchasing house by 7/10/2016 or constructing house by 7/10/2017.
  4. The exemption is available for only 1 new house property.
  5. The new house should be located in India. ( From A.Y. 2015-16 and after that).
  6. You should not own on the date of sale of asset more than 1 residential house ( except new house). You should not purchase within 2 years period or construct within 3 years period any residential house ( except new house). Let say you are selling plot and have 1 house property named A in which you are residing. Now You decide to avail exemption u/s 54F. You purchase new house B after 6 months of sale. In this situation, you cannot purchase or construct any other house property ( Except B) within specified time.
  7. You cannot transfer new house property within 3 years from the date of purchase/ construction. In example above, you cannot sell property B within 3 years from the date of purchase. If you transfer new house within 3 years or purchase/ construct another house ( Except new house), capital gain exempted earlier will be deemed as long term capital gain in the year when new house is transferred or another house is purchased or constructed.
  8. You can avail exemption entire capital gain if cost of new house is more than capital gain otherwise exemption is limited to cost of new house/ new consideration * Capital gain.
  9. Capital gain account scheme is available for exemption u/s 54F. ( discussed separately at the end of the article)

Example for calculation of exemption under section 54F:

Mrs. Jinal has purchased jewellery on 31/1/2010 for 2,12,000. She sells it on 1/4/2014 for Rs. 6,20,000.She owns one house on that date.  She invested the amount received in construction of another ( New) house . The construction is completed on 30/8/2014. She purchased another house on 10/4/2015 for Rs. 10,20,000.

Capital gain for fy 2014-15  
Sale value of jewellery6,20,000
Less indexed cost of purchase2,12,000/632*1024(3,43,493)
Long term capital gain2,76,507
Less exemption u/s 54F2.76,507
Taxable capital gain0
Capital gain for fy 2015-16  
Long term capital gain2,76,507

 

Capital gain exemption u/s 54B:

Following are the conditions

  1. This exemption is available when person has sold agricultural land.
  2. The exemption is available to individual and HUF.
  3. The agriculture land should be used by individual or his parents or HUF family for agricultural purposes for a period of two years, immediately preceding date of transfer ( Sale).
  4. He needs to purchase new agricultural land within two years from the date of transfer to avail exemption u/s 54B.
  5. The exemption is limited to cost of new agriculture land. So if the cost of new agriculture land is more than capital gain, whole capital gain is exempt. Otherwise the difference between cost of new land and capital gain should be chargeable to tax.
  6. The new agriculture land should not be transferred for 3 years from the date of purchase. If the new agriculture land is transferred within 3 years, the capital gain exempted earlier should be chargeable to tax. Additionally, the short term capital gain on transfer of new agriculture land should be taxable. To know taxability of sale of agriculture land, read this post – capital gain on sale of agriculture land.
  7. Capital gain account scheme is available for this exemption.

Example on calculation of capital gain under section 54B:

Mr. Jivabhai has purchased agriculture land on 1/12/2001 for Rs. 3,00,000. The land is situated in municipal limit of gurgaon. He sold this land on 22/12/2010 for Rs. 22,12,000. He purchased other agriculture land for Rs. 6,20,000 on 12/2/2011 and deposited Rs.10,00,000 into capital gain account scheme on 1/4/2012. He purchased new agriculture land on 15/11/2010 for Rs. 5,00,000 and withdrew remaining amount.

Capital gain for FY 2010-11
Sale value of land22,12,000
Less indexed cost of purchase300000/ 426*711(5,00,704)
17,11,296
Less capital gain account scheme deposit(10,00,000)
Long term capital gain7,11,296
Capital gain for FY 2010-11
Amount deposited in capital gain account scheme10,00,000
Less actual utilization of amount for purchase of a.land(5,00,000)
Taxable long term capital gain5,00,000

 

Capital gain exemption u/s 54D:

Following are conditions for availing capital gain exemption u/s 54D:

  1. This exemption is available to any assessee ( Corporate or non corporate)
  2. The capital gain should be arisen from the compulsory acquisition of land or building.
  3. The land or building should form part of industrial understanding for two years from the date of transfer.
  4. The assessee should purchase/construct any land or building within period of 3 years from the date of receipt of compensation to avail exemption u/s 54D.
  5. The new building / land should be used for shifting or re establish of setting of said undertaking or setting up another industrial undertaking.
  6. The assessee should not transfer new land or building within 3 years from the date of purchase otherwise exemption u/s 54D granted earlier should be taxable in the year of sale along with short term capital gain arisen from the sale of new land/ building.
  7. Capital gain account scheme is available for this exemption.

Example of calculation of exemption under section 54D:

TK Ltd. has plot which he used for industrial undertaking purpose. The company purchased the plot on 11/11/2003 for Rs. 8,00,000. The government compulsory acquired the land on 11/11/2010. It paid the compensation of Rs. 30,00,000 on 12/12/2011. The company purchased new plot to use in industrial undertaking on 5/6/2012 for Rs. 40,00,000.

Capital gain for fy 2011-12
Compensation received30,00,00030,00,000
Less indexed cost of purchase8,00,000/463*785(13,56,371)
Long term capital gain16,43,629
Exemption u/s 54D(16.43.629)
Taxable capital gain0

 

Capital gain exemption u/s 54G:

Following conditions should be fulfilled for availing capital gain exemption u/s 54G:

  1. This exemption is available for all assessee.
  2. Capital asset ( Land, building, plant, machinery etc.) is transferred.
  3. The capital asset is used in Industrial undertaking situated in urban area.
  4. The reason of transfer is due to shifting of industrial undertaking to non urban area.
  5. The assessee has purchased a new machinery or plant for the business , acquired building or land or shifted the original asset and incurred shifting expenses (  as per scheme framed by the central government ) in the said non urban area within 1 year before or 3 years after the date of transfer)
  6. The assessee can reduce its capital gain by amount of cost and shifting expenses incurred while transferring undertaking. The new asset should not be transfer within 3 years from the date of purchase.
  7. Capital gain account scheme is available for this exemption.

capital gain exemption u/s 54GA:

Exemption under section 54GA is available when following conditions are satisfied:

  1. Capital asset ( land, building, plant, machinery etc.) is transferred.
  2. The assets are used for the purpose of industrial undertaking situated in urban area.
  3. The reason of transfer is shifting of industrial undertaking to urban area to SEZ ( special economic zone). The sez can be in urban or non urban area).
  4. The assessee has within 1 year before or 3 years after the date of transfer purchased  machinery or plant / purchased building or land or constructed building/ shifted the original asset and transferred the establishment to SEZ and incurred shifting expenses.
  5. The capital gain can be reduced by cost of new asset and shifting expense. The new asset should not be transferred within 3 years from the date of purchase. Otherwise capital gain exempted earlier will be taxable in the year of transfer of new asset.
  6. Capital gain account scheme is available for this exemption.

Capital gain u/s 54GB:

This exemption is applicable from A.Y. 2013-14 and F.Y.2012-13 with following conditions:

  • This exemption is available to individual or HUF.
  • The assessee has sold long term capital asset ( House or plot of land).
  • The sale should be during 1/4/2012 to 31/3/2017.
  • The assessee should invest the sale consideration in equity shares of  of eligible company before the due date of furnishing return of income of assessee. The eligible company should use the amount in the purchase of new asset *within 1 year from the subscription date or it can deposit the amount in capital gain deposit account before due date of furnishing return of income of assessee.
  • Exemption available is investment in new asset by eligible company / Net sale consideration * capital gain.
  • The exemption will be revoked and taxable as long term capital gain when equity shares are sold by assessee within 5 years from the date of purchase of shares or new asset is transferred by eligible company within 5 years from the date of acquisition of asset or the capital gain deposit account is not fully or partially utilized by the eligible company.

note :

*new asset : New asset means plant and machinery but does not include the following:

  1. computers
  2. Computers software
  3. vehicle
  4. Office appliance
  5. Plant or machinery which is used in India or outside India by any person before its installation by the eligible company.
  6. Plant or machinery which is installation in office premise / residence. guest house.
  7. Plant or machinery which is allowed 100% deduction in any previous year.

Capital gain account scheme :

I have mentioned earlier that assessee can get benefit of capital gain account scheme if he does not purchase/ construct new asset immediately.

Following are important points regarding capital gain account scheme:

Capital gain account can be opened via following banks:

  1. State Bank of India
  2. State Bank of Bikaner & Jaipur
  3. State Bank of Hyderabad
  4. State Bank of Indore
  5. State Bank of Mysore
  6. State Bank of Patiala
  7. State Bank of Saurashtra
  8. State Bank of Travancore
  9. Central Bank of India
  10. Bank of India
  11. Punjab National Bank
  12. Bank of Baroda
  13. UCO Bank
  14. Canara Bank
  15. United Bank of India
  16. Dena Bank
  17. Syndicate Bank
  18. Union Bank of India
  19. Allahabad Bank
  20. Indian Bank
  21. Bank of Maharashtra
  22. Indian Overseas Bank
  23. Andhra Bank
  24. Corporation Bank
  25. New Bank of India
  26. Oriental Bank of Commerce
  27. Punjab & Sind Bank & Vijaya Bank
  • Capital gain account can be opened by individual or HUF or eligible company.

Types of capital gain account :

  • Capital gain account is two types. A type account is saving account and B type account is Term deposit account. Interest and withdrawal rules for saving bank account and term deposit account are applicable to A type account and B type account respectively.
  • Capital gain deposit A type account is saving account and assessee can withdraw fund frequently from it like saving account. It is suitable when assessee opts for construction of house.
  • Capital gain deposit account B is term deposit account and assessee can withdraw money on maturity date. If he withdraws before the date of maturity, penalty will be levied. It is suitable when assessee decides to purchase the asset.This account has two types: cumulative and non cumulative. In cumulative account, the interest amount is reinvested and in non cumulative, the interest amount is not reinvested and paid during regular intervals.
  • The interest on capital gain account scheme is credited as per RBI rules. The interest is not tax free and TDS provision will be applicable as per income tax laws.

How to open capital gains account?

Capital gains account can be opened in any of the banks mentioned above by applying in form A with Photograph, pan card copy and address proof. You can deposit the amount via cheque, cash or draft. If your intention to open capital gains account for two section like section 54 or section 54EC, you need to open separate capital gains account via separate application.

Withdrawals from capital gain account scheme:

You can withdraw the amount from capital gains account via filling application in FORM C. The amount can be utilized within 60 days from the date of withdrawal for the specified purpose. For subsequent withdrawal, Form D is required to be used.

Closure of capital gain account :

Assessee can close capital gain account by applying in Form G. In cash death of assessee, nominee or legal heir can close the account by using Form H. Income tax officers approval is required to close the account.

I have tried to cover most of the sections regarding capital gain exemption. I hope it will be helpful to you. Share this post on social media to say thanks.

 

4 Comments

  1. By Mahesh

    May I have the indexaton table for the current year

  2. By Satish Naik

    I had asked your advise on—-If i sell a plot today which was purcased 15 years back, with agreement to sale, in which I will receive the sale value in next five years with equal monthly instalments. What is LTcapital gain tax implication & source of exemption per year. is yearly instalment to be shown in Returns filed/ as part ofcapital gain? can itis instalment used for purchasing for tax exemption bonds? Can it it be put in Capital gain saving/FD a/c, for 5 years? Kindly guide.—Satish Naik

  3. By Satish Naik

    Madam, I ham waiting for your guidence for my querry on on 2 Jan.16.—Satish Naik

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