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Section 54GB of the Income Tax Act can help taxpayers reduce tax liabilities on their capital gains from the sale of their residential property. Section 54GB allows taxpayers to claim exemption from capital gains tax if the net consideration from the transfer of residential property is invested in the equity shares of an eligible start-up company. By investing in eligible start-up companies, taxpayers can be part of the growth of the manufacturing sector and the economy. Learn more about Section 54GB, eligible company, and applicability under 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:
As per section 54GB of the Income Tax Act, Eligible Companies must comply with the following conditions.
The term "New Asset" refers to plant and machinery which not includes the followings:
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.
Benefits of Section 54GB:
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.
If you neglect compliance with Section 54GB, Exemption under Section 54GB will be withdrawn, and you will be bound to pay tax on capital gain for that particular year.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company sells the new assets within 5 years from the subscription date, the exemption under Section 54GB will be withdrawn.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.
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.
Under section 54 of the income tax act, only an individual or the HUF can get a tax exemption on capital gain from the transfer of residential property if the amount of capital gain is invested in constriction or the purchase of a residential property. On the other hand, Section 54GB applies to an individual/HUF if the net consideration is invested in the subscription of equity shares of an eligible start-up company.
The capital gain tax exemption under Sections 54 to 54F is limited to ₹ 10 crores from 1st April 2023. According to Section 54, the new residential house must be located in India, or the exemption will be withdrawn.
Selling assets after specified periods are subject to Long Term Capital Gains Tax (LTCG). It is 20% for gains in real estate, debt funds, and other assets, along with the benefit of indexation.
Listed equity shares, equity-oriented schemes, and Long-term capital gains are fully exempt up to ₹ 1 Lakh, and the balance is taxed at 10% as per Section 112A. This exemption is not available for property.
