Exemption under section 54GB of Income Tax Act 1961

Article explains Important terms for Section 54GB, Conditions to be satisfied to claim section 54GB exemption, Amount of exemption available under section 54GB, Withdrawal of exemption under section 54GB and Capital Gain Deposit Account Scheme.

The provisions of section 54GB of the Income Tax Act exempts the capital gain arising from transfer of a long term capital assets being a ‘residential property’, if the amount is invested in subscription of the equity shares of the eligible company. The present article highlights the said exemption provisions of section 54GB.

Important terms for Section 54GB

Before going through the provisions of section 54GB, it is important to understand the following terms –

♣ ‘Eligible company’ –

The company that satisfies the following conditions is termed as ‘eligible company’ –

• The company should have been incorporated in India.
• The company should have been incorporated during the previous year in which the capital gain has arisen to the subsequent financial year up to the due date of furnishing of the income tax return.
• The company is engaged in the business of manufacturing of an article or a thing.
• The company in which the assessee has more than 50% share capital or more than 50% voting rights after the subscription in equity shares by the assessee.
• The company should qualify to be a medium or small enterprise under the Micro, Small and Medium Enterprises Act, 2006 or the same is an eligible start-up.

♣ ‘Net Consideration’ –

Full value of consideration (-) any expenditure exclusively incurred on account of transfer.

♣ ‘New Asset’ –

• The term ‘new asset’ means new plant and machinery. However, the term ‘new asset’ doesn’t include the following –
  • The plant or machinery being installed in any office premises or any residential accommodation (including accommodation in guest house).
  • The plant or machinery which has been used prior by any other person within or outside India.
  • Any type of vehicle.
  • Any type of office appliances (including computer or computer software).
  • The plant or machinery where whole of the actual cost is allowed as deduction in computing the income chargeable under the head ‘Profit and gains of business or profession’ of any previous year.

Conditions to be satisfied to claim section 54GB exemption

The claimant is required to satisfy following conditions in order to claim exemption under section 54GB of the Income Tax Act –

1. The capital gain has arisen on transfer of a long term capital asset. The long term capital asset should be a residential property (being a house or a plot of land).

2. Only individual or a Hindu Undivided Family (HUF) are eligible for exemption under section 54GB.

3. The claimant is required to utilize the net consideration before the due date of furnishing the income tax return. The said net consideration is to be utilized for subscription in the equity shares of an eligible company.

4. The company should utilize the amount for purchasing the new asset. The amount should be utilized within a period of one year from the date of subscription.

Amount of exemption available under section 54GB

The amount of exemption available under section 54GB is tabulated hereunder –

Withdrawal of exemption under section 54GB

The equity shares of the company and the new assets acquired by the company cannot be transferred for a period of five years from the date of acquisition. However, in case the of transfer, the exemption allowed under section 54GB would be withdrawn.

The amount of exemption claimed under section 54GB would be taxable in the previous year in which the equity shares of the company or the new assets.

Capital Gain Deposit Account Scheme

In order to claim exemption under section 54GB, the claimant is required to re-invest the amount within a period of one year from the date of transfer. However, if the amount is not invested within the due date of filing of the income tax return, then, the claimant is required to deposit the amount into the ‘Capital Gain Deposit Account Scheme’.

The amount so deposited in to the account needs to be utilized for subscription in equity shares within the prescribed time. However, if the amount is not utilized within the given period, the unutilized amount would be taxable in the previous year in which the time period expires.

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