Section 54GB – Capital Gains Exemption on Residential Property Transfers

• Capital Gain Exemptions On Property Transfers
• Assessee Who Is Eligible
• Capital Gains Tax Eligibility
• The Exemption Is Subject To Certain Conditions
• Section 54 Provides An Exemption
• Eligible Company’s Definition
• What Does “Eligible New Asset” Mean?
• The Size of Exemption
• Five Year Lock-in Period

Capital Gain Exemptions On Property Transfers

Any capital gain arising to an individual or HUF from the transfer of a long-term capital asset that is a residential property (a house or plot of land) before the due date of furnishing the return of income under section 139 shall be exempt proportionate to the net consideration price so invested in the subscription of equity shares of an eligible company.

Assessee Who Is Eligible

Individuals as well as HUF

Capital Gains Tax Eligibility

Gain deriving from the sale of a long-term capital asset, such as a house or a plot of land. Such a capital asset transfer should occur between April 1, 2012, and March 31, 2017.

The Exemption Is Subject To Certain Conditions

The assessee has used the net consideration for subscription in equity shares in an eligible company before the due date for filing a return of income. Within one year of the subscription date, the suitable company must spend this money on purchasing an eligible asset.

If such a corporation does not fully or partially use this amount within one year, the unutilized portion is taxable as capital gain in the year in which the one-year limit expires.

Section 54 Provides An Exemption

If the capital gains from the sale of a residential property are invested in the acquisition or building of a residential property, an individual or HUF can benefit from tax exemptions under Section 54 of the Income Tax Act.

Section 54 does not apply to taxpayers such as partnership firms, LLPs, corporations, or any other association or body. However, the following are the conditions that must be met to benefit from the said section:

•  Assets that are classed as long-term capital assets must be classified as such.
• A Residential House is an asset that was sold. The income from such a house should be taxed as House Property Income.
• A residential house shall be purchased by the seller either one year before or two years after the date of sale/transfer. If the seller is building a house, the seller has more time, i.e. the seller has three years from the date of sale/transfer to complete the residential dwelling. The time of acquisition or construction shall be established from the date of receipt of compensation (whether original or extra payment) in the case of compulsory acquisition. The new residential dwelling must be located in India. The seller cannot claim the exemption if they buy or sell a home in another country.

The conditions listed above are cumulative. As a result, even if one of the conditions is not met, the seller is not eligible for the Section 54 exemption.

Eligible Company’s Definition

A corporation that meets all of the following criteria is considered eligible.

1. It is a corporation incorporated in India during the financial year in which the capital gain occurs or in a subsequent financial year up to the due date for filing the section 139 report of income (1)
2. It is a company in which the assessee has 50%+ share capital or more than 50% + voting rights after the assessee has subscribed for shares; it is a company in which the assessee has more than 50% share capital or more than 50% voting rights after the assessee has subscribed for shares.
3. It is a corporation that meets the Micro, Small and Medium Enterprises Act, 2006 (27 of 2006) definition of a small or medium enterprise, i.e. investment in more than 25 lakhs INR equipment but less than 10 crore INR.

What Does “Eligible New Asset” Mean?

New plants and machinery are not included in the definition of a new asset.

1. any apparatus or plant that another person used inside or outside India before being installed by the assessee
2. any plant or machinery installed in any residential accommodation or office, including guest-house accommodation
3. any office equipment, including computers and software
4. any type of vehicle
5. any apparatus or plant,

The entire cost is deducted (whether via depreciation or otherwise) in computing the income chargeable under the heading “Profits and gains of business or profession” in any prior year.

The Size of Exemption

The amount of exemption will be the lesser of the two options.

1. capital gain amount: (Capital Gain*Investment by an eligible company in an eligible asset ) / Consideration of net sale
2. Original asset’s net consideration: Capital asset’s sale price – Expenditure incurred for such transfer.

Five Year Lock-in Period

Suppose the company’s equity shares or new assets are sold or otherwise transferred within five years of their purchase; in that case, the capital gains that were previously exempted will be taxable as capital gains in the transfer year.

This part allows you to take advantage of the Capital Gains Account Scheme of 1988.