Capital
Gains
EXEMPTIONS
FROM CAPITAL GAINS TAXATION
There
are number of exemptionsprovided by the Act where gains on transfer
of a capital asset, though otherwise taxable, are not liable to
tax if certain conditions are satisfied.
Transfer
of a Residential House ( Sec 54)
Long
term capital gains arising on transfer of a residential house (
i.e. building or land appurtenant thereto ) is exempt if the amount
of capital gains is utilised in acquiring another residential house,
either by purchase or by construction. Exemption is also available
if the investment is made partly in the land and partly in the land
and partly in construction of residential house. The benefit is,
however, available only to individuals and Hindu undivided families.
If
the investment cost of new residential house exceeds the amount
of capital gains, there is not tax. Where the cost of new house
is less than the amount of capital gains, the gain in excess of
the cost of new house is taxed as capital gains.
Where
the acquisition of new asset is by purchase, the investment is new
house must be made within one year before or 2 years after the date
of transfer of original asset. Construction of new house must be
completed within 3 years of the date of transfer of the original
asset.
If
the investment in the new asset has not been made by the due date
for furnishing the return of income for the relevant assessment
year, the un -utilised amount of capital gains must be deposited
before the due date of filing of return in a separate bank account
under the Capital Gains Account Scheme ,1988. If the amount deposited
is not utilised wholly or partly for the purpose of purchase or
construction of the new asset within 3 years the un utilised portion
shall be taxable as capital gains in the previous year in which
the period of three years expires.
Transfer
of Agricultural lands (Sec 54B)
This
exemption is available only to individuals. The conditions for exemption
of capital gains are as under :
(i)
Land transferred must have been used at least for two years immediately
before the transfer by the tax payer or his parents for agricultural
purposes.
(ii)
Tax payer must acquire within two years of the date of transfer
another piece of land for use for agricultural purposes.
(iii)
Asset acquired must not again be transferred within 3 years of its
purchase.
Where
the cost of new agricultural land exceeds the amount of capital
gains on transfer of original land, there is no capital gains tax.
If the cost of new asset is less than the amount of capital gains,
the gain in excess of the cost of new asset is alone liable to tax.
If the new asset is not acquired by the due date for filing the
return of income for the relevant assessment year, the un utilised
amount of capital gain must be deposited in a bank account under
the Capital Gains Account Scheme, 1988. Thereafter the new agricultural
land must be acquired within the time period specified by making
appropriate withdrawals from the scheme. If the whole or part of
the amount is not utilised in acquiring the new asset then the un
utilised portion of the deposited amount shall be taxable as capital
gains of the previous year in which the period of two years expires.
Where
the new asset is transferred within 3 years of its purchase, the
exemption is withdrawn in the sense that the cost of new asset is
treated as reduced by the amount of capital gains treated as exempt
at the time of original transfer.
Compulsory
acquisition of Land & Buildings of Industrial Undertakings (
Section 54 D)
This
exemption is available to all categories of tax payers. The conditions
for exemption of capital gains are as under;
(i)
the asset transferred should be land or building or any right in
land or building which formed part of an industrial undertaking
belonging to the tax payer;
(ii)
asset in question is transferred by way of compulsory acquisition
under any law;
(iii)
the asset in question was being used for the purpose of the industrial
undertaking for at least for two years immediately before the date
of compulsory acquisition .
The
exemption is available if within 3 years of the date of compulsory
acquisition, the taxpayer for the purposes of shifting or re-establishing
the old industrial undertaking or setting up a new industrial undertaking
:-
(a)
purchases any other land, building or any other right in any other
land or building, or
(b)
constructs any other building for the purpose of the business of
the assessee.
If
the investment in new asset or assets exceeds the amount of capital
gain, there is no tax. Where the cost of new asset is less than
the amount of capital gain, the exemption is available only for
the amount of investment in the new asset.
If
the new asset is not acquired by the due date for filing the return
of income for the relevant assessment year, the un utilised amount
of capital gain must be deposited in a bank account under the Capital
Gains Account Scheme 1988. Thereafter the new asset must be acquired
within the time period specified by making appropriate withdrawals
from the scheme. If the whole or part of the amount is not utilised
in acquiring the new asset then the un utilised portion of the deposited
amount shall be taxable as capital gains of the previous year in
which the period of three years expires.
If
the new asset is transferred within 3 years of its acquisition,
the exemption is withdrawn in the sense that the cost of acquisition
of the new asset is treated reduced by the amount of capital gain
treated as exempt at the time of original transfer.
Transfer
of industrial undertaking due to shifting from an urban area (Sec
54 G)
The
exemption is available to all categories of tax payers. The conditions
for claiming exemption are as under :
(i)
the transfer is effected in the course of or in consequence of shifting
the undertaking from an urban area to other than an urban area;
(ii)
asset transferred is machinery, plant, building, land or any right
in building or land used for the business of an industrial undertaking
situate in an urban area;
(iii)
the assessee has within one year before or 3 years after the date
of transfer purchased new machinery or plant for the business of
the Industrial Undertaking in the area to which the said undertaking
is shifted and has acquired building or land or has constructed
building for the purposes of his business in the said area and has
shifted the original asset and transferred the establishment of
such undertaking to such area and has incurred expenses on such
other purpose as may be specified in a scheme framed by the Central
Government for the purposes of this section.
If
the expenses for the aforesaid new asset and activities exceed the
amount of capital gain, there is no tax. If the expenses incurred
are less than the amount of capital gain, only the un utlised amount
is taxed as capital gain.
In
order to avail this exemption the un utilised amount of capital
gain as on the date on which return of income for the relevant assessment
year is due must be deposited in a bank account under the Capital
Gains Accounts Scheme, 1988. Thereafter the new asset must be acquired
and expenses related to the assets must be expended within the time
period specified in the section by making appropriate withdrawals
from the Bank account. If the amount deposited in the said scheme
is not utilised wholly or partly for all or any of the purposes
mentioned above within the period of three years then the amount
not so utilised shall be charged as capital gains of the previous
year in which the period of three years from the date of transfer
of the original asset expires.
For
the purposes of this section Urban Area means any such area within
the limits of a municipal corporation or municipality as the Central
Government may notify.
Exemption
for acquiring a residential house ( Section 54F)
This
exemption is available only to individuals and Hindu Undivided Families
in whose case there is a capital gain arising from the transfer
of any long term capital asset other than a residential house .
The following conditions have to be satisfied for claiming the exemption
:
(i)
the tax payer should purchase a residential house within 1 year
before or two years after the date of transfer of the asset in question,
or should construct such a residential house within 3 years of that
date ( herein after called the new asset); and
(ii)
the tax payer must not own any other residential house on the date
of transfer of the asset in question other than the new asset and
also should not purchase within one year after the date of the transfer
any residential house other than the new asset and also should not
construct within a period of three years from the date of transfer
any residential house other than the new asset. If conditions stated
above are violated, the exemption granted is withdrawn in the sense
that the capital gains exempted is treated as long term capital
gains of the year in which such other residential house is purchased
or constructed.
The
exemption is available to the assessee if the investment in new
residential house is equal to or more than the net consideration
in respect of the original asset.However, if the investment in new
asset falls short of the net consideration, the amount of capital
gain not chargeable to tax is equal to :
Cost
of new asset X Long term capital gains
Net
consideration received
For
the purposes of this section the 'net consideration' means the full
value of the consideration received or accruing as a result of the
transfer of the capital asset as reduced by any expenditure incurred
wholly or exclusively in connection with such transfer.
The
exemption may not be allowed if the net consideration which is not
utilised till the date for filing of the return of income of the
relevant year is not deposited in a bank account under the Capital
Gains Account Scheme,1988 before the due date of filing of return
of income. If the sums deposited are not utilised wholly or partly
for the purpose of new residential house within the time period
specified , then the difference between the capital gains exempted
earlier and the capital gains utilised shall be treated as capital
gains of the previous year in which the period of three years expires.
Similarly the exemption is also withdrawn if the residential house
acquired is transferred within 3 years from the date of its purchase
or construction. In such cases the capital gain exempted is treated
as long term capital gain of the year in which residential house
is transferred.
Exemption
in respect of investment in specified securities (Sec 54 EA)
This
exemption is available to all the assessees in respect of the long
term capital assets transferred on or after 1st October, 1996.
The
exemption from tax on capital gains is available in cases where
the whole or part of the net consideration is invested in specified
bonds or debentures or shares of a Public Company or units of a
mutual fund whose income is exempt under clause 10(23D) of the Income
Tax Act within six months of the date of transfer of the capital
asset. The shares , debentures ( Specified securities ) etc., which
will qualify for exemption are those which are notified by the Central
Board of Direct Taxes.
Where
the amount invested in the specified securities is more than the
net consideration in respect of the original asset , the whole of
the capital gains is exempt. Where the amount invested in the specified
securities is less than the net consideration in respect of the
original asset the exemption is calculated as under :
Capital
gains X Amount invested in the specified securities
Net Consideration
If
the specified securities are transferred or converted ( otherwise
than by transfer ) into money within three years from the date of
their acquisition , the capital gains exempted earlier shall be
deemed to be capital gains of the previous year in which the securities
are so transferred or converted. Taking of any loan on the security
of such specified securities amounts to conversion of the securities
into money on the date on which such loan/advance is taken.
'Net
Consideration' for this section is defined as the full value of
the consideration received or accruing as reduced by the expenditure
incurred wholly and exclusively in connection with such transfer.
Exemption
for investment in specified assets ( Sec 54 EB)
The
Income Tax Act also provides exemption from the capital gains tax
where the capital gains are invested in certain specified assets
as notified by the Central Board of Direct Taxes. The exemption
is available only in respect of long term capital gains where the
following conditions are fulfilled :-
- the
whole or any part of the capital gains is invested in specified
assets.
- the
specified assets are not transferred or converted ( otherwise
than by transfer ) into money for a period of seven years from
the date of their acquisition.
- where
the amount invested in the specified assets is equal to or more
than the capital gains , no capital gains is leviable.
- where
the amount invested in the specified assets is less capital gains
, the exemption is restricted proportionately to the amount invested
with respect to the whole of the capital gains.
If
the specified assets are transferred or converted into money before
a period of seven years the capital gains exempted earlier shall
be treated as long term capital gains of the previous year in which
the specified asset is transferred or converted. It has also been
provided that rebate under section 88 is not allowable in respect
of the investments in specified assets.
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