Capital Gains Exemption

Capital gains exemption refers to the benefit offered by the Government to taxpayers, relaxing the need to pay tax on capital gains. When a taxpayer sells an asset (other than personal belongings and items of stock used in the business) for a profit, the need to pay capital gains tax arises. Hence, it is necessary for taxpayers who are planning to purchase or sell a capital asset to pay attention to the tax planning aspects of the transaction. Taxpayers who are aware of the various provisions of Income Tax and related Capital Gains Exemptions are able to benefit from reducing the incidence of tax. The duration of holding a capital asset and the various expenses and other deductions to be claimed for arriving at the final quantum of taxable capital gains has a direct bearing on the amount of income tax to be paid on capital gains in relation to the transfer of the capital assets carried out by the assessee. Hence, its important for all taxpayers to know about the relevant capital gains exemptions while purchasing or selling capital assets.

Long-Term Capital Gains Exemption on Sale of House Property

Taxpayers involved in selling a residential house after holding it for a minimum period of three years can enjoy exemption from capital gains if the entire amount of long-term capital gains is used for the purchase of another residential house property. To enjoy this capital gains exemption, the taxpayer must reinvest the gains from sale of residential property within a certain period as follows:

Within one year in anticipation of the transfer of residential property.
Within two years of the transfer of residential property.
If the new house property should be constructed, in such cases within three years of the transfer of residential property.

To claim full exemption of long-term capital gains, the entire long-term capital gain in respect of the transfer of the first residential house property must have been re-invested. In case a taxpayer does not re-invest the entire long-term capital gain, then the amount not utilised would be subject to long-term capital gains. Also, any amount of long-term capital gain not utilised at the time of filing of

income tax return must be deposited with a bank under a Capital Gains Account Scheme and the receipt should be enclosed with the income tax return. The amount of unutilised capital gain not utilised and deposited in the bank under the scheme can be withdrawn by the taxpayer, as and when required. However, the amount must be fully utilised within the aforesaid period of two years from the date of transfer of the first residential house property. In the case of construction of a new house, the time allowed will be three years instead of two years.

Long-Term Capital Gains Exemption on Investment in House Property

Taxpayers can avail of long-term capital gains exemption under Section 54F, if they sell any type of capital asset (other than a residential house) like shares, a plot of land, commercial assets, commercial house property, jewellery, and so on, and reinvest the gains for the purchase of a residential house property. This capital gains exemption can be availed by taxpayers only if the assessee does not own any residential house as on the date of the transfer of the capital asset. The entire net sale proceeds from the sale of a capital asset must be invested within:

One year of the transfer in advance.
Within two years from the date of transfer in the purchase of a residential house property.
Sale proceeds may be invested within three years in the case of construction of a residential house property.

Taxpayers availing of this provision to avoid capital gains are required to not buy within one year any other residential house or a flat or should not construct within three years any residential house from the date of transfer of the original capital asset. Also, the lock-in period for the new residential house so acquired is three years. Hence, the newly acquired house should not be so sold or transferred within a period of three years. If transferred before three years, the entire capital gain would become taxable in the year in which the sale takes place.

Capital Gains Exemption for Agricultural Land

Long-term and short-term capital gains are exempt for agricultural land which was being used by the assessee or a parent of his for agricultural purposes, for two years immediately preceding the date of transfer. However, the assessee should, within a period of two years after that date, have purchased any other land for being used for agricultural purposes. 1

Capital Gains Exemption for Investment in Private Limited Company

As per the Finance Act, 2012 the tax on long-term capital gains on transfer of a residential house will be exempted if invested in shares of a

private limited company and used for the purchase of plant and machinery.

Capital Gains Exemption for Business Assets

Under Section 54D of the Income Tax Act, capital gains exemption can be claimed by persons owning an industrial undertaking on the transfer of land or building used for the purposes of business. Capital gains exemption is available in cases where the land or building which is compulsorily acquired was used by the taxpayer for the purposes of the business during the two years immediately preceding the date of compulsory acquisition and the assessee purchases any other land or building or constructs any building, within two years from the date of compulsory acquisition, for the purposes of shifting or re-establishing the industrial undertaking or setting up another industrial undertaking. In such cases the capital gain will not be charged to tax to the extent it is utilised for purchasing or constructing the specified new asset.