Capital Gains Exemptions [Section 10(37), 54, 54B, 54D]

Introduction:

Since we receive greater income due to capital gains, we must pay more tax during that year. The income tax department developed the idea of capital gain exemptions to address this problem. If we receive money from the sale of capital assets, we have the choice to deposit it in our CGAS account before filing our income tax return or before the return’s due date, which is typically July 31st. We are then required to use that money for specific investments within a specific time frame. Simply visit the bank, open a CGAS account, and transfer the necessary funds there if we are unable or unwilling to pay tax this year. Only at some nationalised sites are CGAS accounts able to be created. If the amount in the CGAS account is not utilised within 2 years for the purchase of property or within 3 years for the purpose of construction of a building, then in the year of expiration, you have to pay tax on the amount remaining in that account.

Section 10(37): Exemption of capital gains on compulsory acquisition of urban agricultural land:

Rural agricultural land is not a capital asset, so no discussion is required here. If the government acquired any urban agricultural land from farmers in a compulsory situation, then those farmers who sold that land were not liable under capital gains; they benefited from complete exemption from those gains. Only individuals and HUFs are covered under this section. This exemption is available as of April 1, 2004, and it only applies if the land was solely utilised for agricultural purposes in the two years prior to the sale by the individual, his parents, or a HUF.

Section 54: Capital Gain on Sale of Residential House Property

• This provision applies to both individuals and HUFs, and residential property must be occupied for at least 24 months in order to qualify as a long-term capital asset. If we give it for rent, we must disclose income from such property under income from house property; otherwise, we must show it in the house property head as self-occupied.
• If the amount of capital gains received exceeds two crores:

If we already purchased any residential house property before one year from the date of transfer or within two years after the date of transfer, then the amount we spent on the purchase of that property is exempt.

If we construct any ONE residential property within three years after the date of transfer, then the amount we spent on the construction of that property is exempt. Contrary to the buying point, construction must be finished here after the date of transfer.

• If the amount of capital gains received equals or is less than two crores:

The money we spent on the purchase of a property is exempt if we purchase a maximum of TWO residential properties in India before the year of the date of transfer or within two years after the date of transfer.

The money we spent on constructing that property is exempt if we construct a maximum of TWO housing properties in India within three years from the transfer date.

• If the capital gain exceeds two crores, the assessee should (but not must) acquire or construct; however, if the capital gain is less than or equal to two crores, the assessee may, at his discretion, purchase or construct.

• Either the purchase or construction of property must be in India. If we spent the full capital gain amount on purchase or construction, then we are getting full exemption, and if we spent less than the capital gain amount received, then up to the amount spent, we can claim exemption. So based on our spending, we can claim exemption, but only up to the amount of capital gain received.

• At the end of the year of sale, if we spent before the date of return filling, we can claim exemption; otherwise, we must transfer that amount to our CGAS account before return filling. After purchase or construction, if we sell the asset before 3 years from the date of purchase or construction, the cost of acquisition will be reduced with the capital gains exempted earlier when computing capital gains.

For Example:

Case 1:

If x sold an asset for three crores, the long-term capital gain is two crores fifty lakhs, and the cost of a new residential property is two crores seventy lakhs, then he is fully exempt.

Case 2:

If x sold an asset for three crores and the long-term capital gain is two crores fifty lakhs and the cost of a new residential property is two crores, then only up to two crores are exempt, and on the remaining fifty lakhs, tax is applicable at 20%.

Case 3:

If x sold an asset for three crores and the long-term capital gain is two crores fifty lakhs and the cost of a new residential property is two crores, then only up to two crores are exempt, and on the remaining fifty lakhs, tax is applicable at 20%. If x sells that newly owned residential house property within three years from the date of acquisition for Rs. 4 crore, then the capital gain will be Rs. 4 crore.

Case 4:

If x sold an asset for three crores, the long-term capital gain is two crores fifty lakhs, and the cost of a new residential property is two crores seventy lakhs, then he is fully exempt. If x sold that newly owned residential house property within three years from the date of acquisition for Rs. 4 crores, then the capital gain will be [4 crores-(2.7 crores-2.5 crores)], which is equal to 3.8 crores, which is the taxable capital gain. 

Section 54B: Capital Gains on Transfer of Agricultural Land

This section is applicable to individuals and HUFs, and the asset must be long-term urban agricultural land that has been used for agricultural purposes for at least two years before the date of transfer by the individual, his parents, or HUFs. If the individual or HUF purchases another agricultural land within two years from the date of transfer, then only an exemption will apply. For example,

Case 1:

If x sold an asset for three crores, the long-term capital gain is two crores fifty lakhs, and the cost of a new agricultural land is two crores seventy lakhs, then he is fully exempt.

Case 2:

If x sold an asset for three crores and the long-term capital gain is two crores fifty lakhs and the cost of a new agricultural land is two crores, then only up to two crores are exempt, and on the remaining fifty lakhs, tax is applicable at 20%.

Case 3:

If x sold an asset for three crores and the long-term capital gain is two crores fifty lakhs and the cost of a new agricultural land is two crores, then only up to two crores are exempt, and on the remaining fifty lakhs, tax is applicable at 20%. If x sells that newly owned agricultural land within three years from the date of acquisition for Rs. 4 crore, then the capital gain will be Rs. 4 crore.

Case 4:

If x sold an asset for three crores, the long-term capital gain is two crores fifty lakhs, and the cost of a new agricultural land is two crores seventy lakhs, then he is fully exempt. If x sold that newly owned agricultural land within three years from the date of acquisition for Rs. 4 crores, then the capital gain will be [4 crores-(2.7 crores-2.5 crores)], which is equal to 3.8 crores, which is the taxable capital gain.

Section 54D: Capital Gains on Transfer by Way of Compulsory Acquisition of Land and Building of an Industrial Undertaking:

This section is applicable to any assessee, and here land and buildings should be used by the assessee in the two immediately preceding years before the date of transfer for the business of industrial training, and the assessee must purchase any land or construct any building within three years from the date of transfer.

Case 1:

If x sold an asset for three crores, the long-term capital gain is two crores fifty lakhs, and the cost of a new land and building is two crores seventy lakhs, then he is fully exempt.

Case 2:

If x sold an asset for three crores and the long-term capital gain is two crores fifty lakhs and the cost of a new land and building is two crores, then only up to two crores are exempt, and on the remaining fifty lakhs, tax is applicable at 20%.

Case 3:

If x sold an asset for three crores and the long-term capital gain is two crores fifty lakhs and the cost of a new land and building is two crores, then only up to two crores are exempt, and on the remaining fifty lakhs, tax is applicable at 20%. If x sells that newly owned land and building within three years from the date of acquisition for Rs. 4 crore, then the capital gain will be Rs. 4 crore.

Case 4:

If x sold an asset for three crores, the long-term capital gain is two crores fifty lakhs, and the cost of a new land and building is two crores seventy lakhs, then he is fully exempt. If x sold that newly owned land and building within three years from the date of acquisition for Rs. 4 crores, then the capital gain will be [4 crores-(2.7 crores-2.5 crores)], which is equal to 3.8 crores, which is the taxable capital gain.

Conclusion:

If you observe all the above sections, case 4 is more beneficial compared to case 3 because in case 4 you are purchasing a property that costs more than the long-term capital gain available for exemption, so you are claiming full exemption, and if we sell it within the three-year lock-in period, you are also liable to pay on the net amount received only. But in case 3, at first, you are liable to pay on the excess long-term capital gain remaining after exemption received, and if we sell it within the three-year lock-in period, then you are liable to pay on the entire amount received because the cost of acquisition is equal to exemption received. In case 3, you are liable to pay a tax of 4.5 lakhs (50 lakhs plus 4 lakhs = 4.5 lakhs) to the government, but in case 4, you are liable to pay a tax of 3.8 lakhs to the government, so it’s better to invest more in capital assets instead of paying tax to the government.