In a bid to simplify and rationalise the system of capital gains taxation, the Budget (July 2024) brought forward a slew of changes — removal of indexation being one of them. But what has not changed are the sections of the Income Tax Act that provide for exemptions from capital gains. If one were to go by these sections, he or she can even get away with paying zero taxes on capital gains. Here are three such sections you need to know.
Section 54
In case of long-term capital gains from sale of residential house properties, section 54 is for you. To avail of the exemption, the section requires the taxpayer to invest the sale proceeds in another residential house property in India (let’s call it ‘new asset’) — to be constructed within three years from the date of sale or to be purchased within two years from the date of sale or to have been purchased within one year before the date of sale. In case your capital gain does not exceed ₹2 crore, you can invest in not one but two house properties, although this option is available only once in a lifetime.
The quantum of exemption under this section shall be the lower of:
(A) capital gain
(B) cost of new asset (limited to ₹10 crore)
It is to be understood that the section does not prohibit investment in the new asset in excess of ₹10 crore. It only caps the exemption quantum. For example, if the new asset costs ₹15 crore, (B) will be capped at ₹10 crore. Also, the exemption comes with a three-year lock-in period on the new asset.
Further, taxpayers can park the sale proceeds temporarily in the Capital Gains Accounts Scheme (CGAS) deposit till they find a suitable property to purchase or construct. This must be done before the due date of furnishing tax return for the financial year in which the sale occurred. If done, the amount of such deposit will be considered as the cost of new asset (B) in the above calculation, however limited to ₹10 crore.
When a suitable opportunity to invest arises in the future, this deposit can be liquidated to fund the same. CGAS deposits can be savings accounts or term deposits and earn interest at par with other savings accounts and term deposits. Interest on CGAS deposits is taxable, though.
Bottom line: This section enables taxpayers to save taxes on capital gains up to ₹10 crore.
Section 54EC
In case of long-term capital gains from sale of land, building or both, section 54EC provides exemption if the taxpayer invests the proceeds of the sale in the bonds of Rural Electrification Corporation (REC), Power Finance Corporation (PFC) or of Indian Railway Finance Corporation (IRFC) within six months from the date of sale. However, the maximum investment in these bonds with respect to a financial year is capped at ₹50 lakh.
The quantum of exemption under this section shall be the lower of:
(A) capital gain
(B) cost of bonds
These bonds carry a coupon rate of 5.25 per cent per annum and such interest is taxable. A lock-in period of five years applies to these bonds, whose tenure is also five years. It is to be noted that even the act of using these bonds as collateral for loans will be considered as a breach of the lock-in period.
Taxpayers can save taxes on capital gains up to ₹50 lakh under this section.
Section 54F
This section deals with exemption from long-term capital gains on sale of all kinds of capital assets (including shares, mutual funds) except residential house properties. To claim the exemption, the section mandates the taxpayer to invest the sale proceeds in one residential house property in India (let’s call it ‘new asset’) – to be constructed within three years from the date of sale or to be purchased within two years from the date of sale or to have been purchased within one year before the date of sale.
The quantum of exemption is calculated as A*(B/C), where A -> capital gains on the sale of the original asset, B -> cost of new asset, C -> proceeds from the sale of the original asset. However, B is limited to ₹10 crore, similar to section 54. CGAS deposit option is available under this section as well.
Additionally, there are a few other conditions to be met. First, the assessee should not have owned more than one residential house property, apart from the new asset, on the date of sale of the original asset. Second, the assessee should not have purchased another house property, apart from the new asset, within two years from the date of sale of the original asset and should not have constructed another house apart from the new asset, within three years from the date of sale of the original asset. Third, a lock-in period of three years applies to the new asset.
Taxpayers can save taxes on capital gains up to ₹10 crore under this section.
Dual benefit possible
Experts opine that claiming exemption under these sections is mutually exclusive. Simply put, claiming exemption under one section does not restrict an eligible taxpayer to claim under another section, provided the conditions laid out in the respective sections are met. For example, if a residential house property is sold, exemption can be claimed both under sections 54 and 54EC.