What is Section 54EE of the Income Tax Act?
The Income Tax Department introduced Section 54EE of the Income Tax Act with effect from April 1, 2017, offering Capital Gains Tax exemption on the sale of any long-term capital asset when the proceeds are reinvested into units of specified funds.
Under Section 54EE, the amount of the exemption is the lower of:
- The cost of the new asset (units of specified funds), or
- The capital gains from the sale of the long-term capital asset.
This provision encourages investment in specified funds, aiming to promote financial growth and wealth creation for taxpayers. By offering tax incentives for reinvestment, the government seeks to stimulate investment activity and direct capital into productive sectors of the economy.
What is the Eligibility for Section 54EE Exemption?
To avail the exemption under Section 54EE, the assessee must satisfy the following conditions:
- Capital Gain from Transfer of Long-Term Capital Asset: The assessee must have earned a capital gain from the transfer of a long-term capital asset, meaning the exemption is not available for short-term capital assets.
- Investment in Long-Term Specified Asset: The assessee must have reinvested either the whole or part of the capital gain in long-term specified assets, which refers to units of funds notified by the Government, issued before April 1, 2019.
- Investment Timeline: The reinvestment must be made within six months from the date of transfer of the capital asset.
- Investment Limit in a Financial Year: The investment in long-term specified assets in any financial year should not exceed INR 50 Lakhs.
- Aggregate Investment Limit: The total investment made in long-term specified assets (from capital gain arising from the transfer of one or more long-term capital assets) should not exceed INR 50 Lakhs during the financial year of transfer and the subsequent financial year.
How Much Exemption is Available Under Section 54EE?
Once the assessee satisfies all the above criteria, they are eligible to avail the exemption under Section 54EE to the extent of the lower of the following amounts:
- The amount of capital gain invested into the long-term specified asset, or
- INR 50 Lakhs
The maximum investment eligible for exemption is INR 50 Lakhs.
Let’s calculate the exemption for Arnav’s case:
- Investment in new specified assets - Rs.45,00,000
- Capital gains from the sale of a long-term capital asset - Sale value of commercial property (INR 60,00,000) minus the purchase value (INR 30,00,000) = INR 30,00,000.
In this scenario, the capital gains amount (INR 30,00,000) is less than the investment amount in new assets (INR 45,00,000). Hence, the exemption under Section 54EE will be INR 30,00,000.
Arjun will be able to claim a deduction under section 54EE as follows:
| Particulars |
Amount |
| Sales Consideration |
60,00,000 |
| Less: Index Cost of Acquisition (30,00,000*317/264) |
(36,02,272) |
| Long-Term Capital Gains |
23,97,728 |
| Cost of Specified Investment |
45,00,000 |
| Section 54EE Exemption Amount |
23,97,728 |
What is the Lock-in Period of Newly Acquired Long Term Specified Asset Under Section 54EE?
To claim the exemption under Section 54EE, the assessee is required to invest in a 'long-term specified asset. ' There is a lock-in period of three years on the amount invested. This means the assessee cannot transfer or convert the long-term specified asset for a period of three years.
What Happens if Specified Asset is Transferred Within Lock-in Period?
If the assessee transfers or converts the long-term specified asset before the three-year lock-in period, the exemption claimed under Section 54EE will be revoked. The exempted amount will then be treated as taxable capital gain in the financial year in which the transfer or conversion occurs.
Let’s understand this with an example -
Under Section 54EE of the Income Tax Act, a 3-year lock-in period applies to claim capital gains exemption. Here’s what happens in different scenarios:
Situation 1: Selling the Investment Before 3 Years
If the taxpayer sells the specified investment within 3 years of purchase, the exemption under Section 54EE is revoked. The exempted amount is added back to the taxable capital gains.
The amount of exemption availed will be subtracted from the cost of the asset.
Capital Gains = Total Sales Value - Cost of the Asset
If the taxpayer takes a loan or advance against the specified investment within 3 years, the investment is treated as sold on the date of the loan/advance. The exemption under Section 54EE is withdrawn, and the exempted amount is added back to taxable income under capital gains.
Situation 2: Selling Investment After 3 Years
If the taxpayer sells the investment after 3 years, the exemption remains intact.
Note: Earlier, taxpayers could reduce the capital gains by applying indexation; however, after the 2025 budget, the indexation benefit has been removed.
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