Invest in the long term specified asset and get long term capital gain exempt under section 54EE of the Income Tax Act

In case there is a long term capital gain, and the assessee invests the amount into a long term specified asset, then, such assessee would be eligible to avail exemption under section 54EE of the Income Tax Act provided all the other conditions are satisfied. The exemption provisions of section 54EE are taken up and explained in the current article.

long term capital gain

Circumstances under which exemption is available under section 54EE

In order to avail exemption under section 54EE, the assessee is required to satisfy the following norms –

1. The assessee should have earned a capital gain on account of transfer of a . Meaning thereby, the exemption is not available on the transfer of a short term capital asset.

2. The assessee has invested (whole or part) of the capital gain in the long term specified asset. The long term specified asset here means units of funds, as notified by the Government, issued before 1st April 2019.

3. The investment into a long term specified asset is to be made within a period of six months from the date of transfer.

4. The investment in the long term specified asset, during any financial year, doesn’t exceed INR 50 Lakhs.

5. The total investment made in the long term specified asset (from capital gain arising on transfer of one or more long term capital asset) doesn’t exceed INR 50 Lakhs during the financial year in which the long term capital asset is transferred and also in the subsequent financial year.

Amount of exemption available under section 54EE of Income Tax Act

On satisfying all the above criteria, the assessee would be eligible to avail exemption under section 54EE to the extented of lower of the following amounts –

1. Amount of capital gain invested into long term specified asset; or

2. INR 50 Lakhs

The maximum amount that can be invested is Rs. 50 lakh.

Lock-in period of newly acquired long term specified asset under Section 54EE

As seen, in order to claim the exemption under section 54EE, the assessee is required to invest into ‘long term specified asset’. There is a lock-in period of three years on the amount invested into the long term specified asset. It means that the assessee cannot transfer or convert the long term specified asset for a period of three years.

Consequences if long-term specified asset is transferred within lock-in period of 3 years [Section 54EE(2)]

In case the assessee transfers or converts the long term specified asset before the lock-in period of three years. Then, the exemption claimed under section 54EE would be deemed to be income chargeable under the head ‘Capital Gain’ in the previous year in which transfer/ conversion has taken place.

Extract of Section 54EE of Income Tax Act, 1961

Capital gain not to be charged on investment in units of a specified fund.

54EE. (1) Where the capital gain arises from the transfer of a long-term capital asset (herein in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section, namely:—

 (a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45;

 (b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under section 45:

Provided that the investment made on or after the 1st day of April, 2016, in the long-term specified asset by an assessee during any financial year does not exceed fifty lakh rupees:

Provided further that the investment made by an assessee in the long-term specified asset, from capital gains arising from the transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.

(2) Where the long-term specified asset is transferred by the assessee at any time within a period of three years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such long-term specified asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head “Capital gains” relating to long-term capital asset of the previous year in which the long-term specified asset is transferred.

Explanation 1.—In a case where the original asset is transferred and the assessee invests the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset and such assessee takes any loan or advance on the security of such specified asset, he shall be deemed to have transferred such specified asset on the date on which such loan or advance is taken.

Explanation 2.—For the purposes of this section,—

 (a) “cost”, in relation to any long-term specified asset, means the amount invested in such specified asset out of capital gains received or accruing as a result of the transfer of the original asset;

 (b) “long-term specified asset” means a unit or units, issued before the 1st day of April, 2019, of such fund as may be notified by the Central Government in this behalf.

Read Also:-

1 Exemption under section 54GB of Income Tax Act 1961
2 Section 54GA Exemption under Income Tax Act, 1961
3 Capital gain exemption under section 54G of Income Tax Act, 1961
4 Section 54F Capital Gain Tax Exemption
5 Section 54EE Tax Exemption on long term capital gain
6 Section 54EC Exemption available on investment in certain specified bonds
7 Section 54D Exemption from capital gain on compulsory acquisition of land or buildings forming part of industrial undertaking
8 Exemption from capital gain on transfer of agricultural land – Section 54B
9 Exemption available under section 54 of Income Tax Act

Author Bio

Qualification: CA in Practice
Company: Taxguru Consultancy / Taxguru Edu
Location: Mumbai, Maharashtra, IN
Member Since: 27 Feb 2017 | Total Posts: 821
A Blogger by Passion and a Chartered Accountant by Profession. View Full Profile

My Published Posts

More Under Income Tax

Leave a Comment

Your email address will not be published. Required fields are marked *