Exemption under section 54GB of the Income Tax Act 1961

What is section 54GB?

Section 54GB is a provision of the Income Tax Act 1961 that allows an individual or a Hindu Undivided Family (HUF) to claim exemption from capital gains tax on the transfer of a long-term residential property. The exemption is available if the net consideration from the sale is invested in the equity shares of an eligible company engaged in manufacturing an article or a thing. The eligible company should also use the funds to purchase new plants and machinery within one year from the date of subscription. The exemption amount is calculated as follows:

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Important Terms to Understand for Section 54 GB:

Eligible Companies:

As per section 54GB of the Income Tax Act, Eligible Companies must comply with the following conditions.

• The company should be incorporated in India.
• The company should be incorporated during the previous year in which the taxpayer earns capital gain up to the succeeding financial year up to the due date of furnishing of ITR.
• The company should be dealing in manufacturing an article or a thing.
• The Assessee should have more than 25% of voting rights or more than 25% of share capital after the subscription of equity shares of the company.
• The company should be a medium or small enterprise under the MSME (Micro, Small, and Medium Enterprises) Act 2006.

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New Asset:

The term "New Asset" refers to plant and machinery which not includes the followings:

• Any machinery or plant was used outside and within India by any other on before installation by the assessee.
• Any machinery or plant placed in any office site or any residential accommodation (Including guest house)
• Any instruments, including computer and computer software
• Any vehicle
• Any machinery or plant whose entire cost is allowed as a deduction in computing the income, chargeable under the head PGBP of any previous year.

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Net Consideration:

The term "Net Consideration" refers to the total value of the consideration received for transferring long-term capital assets reduced by any expenditure exclusively incurred in connection with the transfer.

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What are the Benefits of Section 54GB?

Benefits of Section 54GB:

• Investment in SMEs: The investor can invest in an SME engaged in the manufacturing, producing, or processing of goods.
• Lock-in Period: The investment made under Section 54GB must be held for fivethree years; otherwise, the exemption claimed will be revoked.
• Maximum Investment Limit: The maximum investment limit under Section 54GB is Rs. 50 lakhs.
• Eligibility Criteria: To be competent for the benefits of Section 54GB, an individual or HUF must have held the residential property for at least three years before selling it.

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What are the Conditions applicable to claim exemption under Section 54GB?

• The capital gain occurred from transferring residential property such as a house or a plot of land.
• The capital gain should have appeared to an individual or Hindu undivided family (HUF)
• The amount of net consideration should be utilized in the subscription of equity shares of eligible start-ups and by an individual or the HUF. If the net consideration has not been fully utilized in the subscription of equity shared, the portion of the amount invested shall be exempted under section 54.
• The company should have invested the share capital in eligible new assets within one year from the subscription date
• The company's assets and equity shares have not been sold or transferred by the company, individual, or the HUF, as the case may be, within 5 years from the acquisition date.

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What is the amount of exemption available to claim under Section 54GB?

• The amount of exemption that you can claim under Section 54GB is lower than The amount of capital gain occurring from the sale of the residential property
• The amount of exemption you can claim under Section 54GB is lower than the amount invested in the equity shares of the eligible company.

If you invest only a part of the net consideration in the equity shares of the start-up company, then the exemption will be proportionately reduced.

Withdrawal of exemption U/S 54GB of Income Tax Act

If you neglect compliance with Section 54GB, Exemption under Section 54GB will be withdrawn, and you will be bound to pay tax on capital gain for that particular year.

For example, If you sell the equity shares or the start-up company sells the new assets within 5 years from the subscription date, the exemption under Section 54GB will be withdrawn. And the amount of exemption claimed will be taxable in the previous year in which you sold the equity shares or the company sold the new assets.

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What is Capital Gains Account Scheme?

The capital gain account scheme allows the assessee to claim an exemption under section 54GB of the Income Tax Act, 1961, by depositing the net consideration in a CGAS account before the due date of filing their income tax returns. The amount deposited in this account can be used for purchasing or constructing a new residential property within one year of the original asset's sale date.

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