Capital Gains Exemptions – Section 54 Series Overview

Sold house for ₹1 crore profit - tax ₹20+ lakh? Not necessarily! Buy another house → Exemption under Section 54. Sold agricultural land → Section 54B. Let's explore all 8 major exemptions to save capital gains tax legally!

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The Section 54 Family

8 exemptions for capital gains tax savings:

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Section 54 - Residential House Property

Most popular exemption!

Conditions:

1. Asset sold: Residential house property (LTCG only)
2. Investment: Purchase new residential house
   • Within 1 year before sale OR
   • Within 2 years after sale OR
   • Construct within 3 years after sale
3. Location: Anywhere in India
4. Lock-in: Cannot sell new house within 3 years (else exemption reversed)

Exemption amount:

• If cost of new house ≥ LTCG: Full exemption
• If cost of new house < LTCG: Proportionate exemption

Example:

Sold Mumbai house:

• Sale price: ₹1.5 crore
• Indexed cost: ₹80 lakh
• LTCG: ₹70 lakh

Scenario 1 - Buy Pune house for ₹80 lakh:

• Investment (₹80L) > LTCG (₹70L)
• Exemption: ₹70 lakh (full!)
• Tax: Nil

Scenario 2 - Buy Pune house for ₹50 lakh:

• Investment (₹50L) < LTCG (₹70L)
• Exemption: ₹50 lakh (invested amount)
• Taxable LTCG: ₹20 lakh
• Tax: ₹20L × 20% = ₹4 lakh

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Section 54F - Any Asset to Residential House

Extension of Section 54 for non-house assets

Conditions:

1. Asset sold: Any LTCA (shares, land, gold) EXCEPT residential house
2. Investment: Purchase/construct residential house (within same timeline as 54)
3. Additional condition: Must NOT own more than 1 house on sale date (excluding new purchase)
4. Lock-in: 3 years

Exemption calculation:

Exemption = LTCG × (Investment in new house / Net consideration)

Example:

Sold shares:

• Sale: ₹1 crore
• Cost: ₹40 lakh
• LTCG: ₹60 lakh

Bought house: ₹80 lakh

Exemption: ₹60L × (₹80L / ₹1 cr) = ₹48 lakh

Taxable: ₹12 lakh

If invested full ₹1 cr: Full ₹60L exempt!

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Section 54EC - Investment in Bonds

Quick exemption without purchasing property

Conditions:

1. Asset sold: Any LTCA (house, land, shares, gold)
2. Investment: Specified bonds (NHAI, REC, PFC bonds)
3. Timeline: Within 6 months of sale
4. Limit: ₹50 lakh per financial year
5. Lock-in: 5 years (cannot sell/pledge bonds)

Interest: Bonds give ~5.25% interest (taxable)

Example:

Sold land: LTCG ₹80 lakh

Invest in bonds: ₹50 lakh (max limit)

• Exemption: ₹50 lakh
• Taxable LTCG: ₹30 lakh
• Tax saved: ₹50L × 20% = ₹10 lakh!

Benefit: Liquidity after 5 years (vs 3 years for house)

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Section 54B - Agricultural Land

For farmers/agricultural land owners

Conditions:

1. Asset sold: Agricultural land (used by assessee/parents for agriculture in last 2 years)
2. Investment: Purchase new agricultural land within 2 years
3. Lock-in: 3 years

Exemption: Same formula as Section 54

Example:

Farmer sold agricultural land:

• LTCG: ₹30 lakh

Bought new farmland: ₹35 lakh

• Exemption: ₹30 lakh (full)
• Tax: Nil

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Section 54D - Compulsory Acquisition

For government acquisitions

Conditions:

1. Asset sold: Land/building compulsorily acquired
2. Investment: Purchase/construct new land/building for same business/profession within 3 years
3. Lock-in: 3 years

Enhanced compensation: Also eligible (taxed in year received, can reinvest)

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Section 54G - Industrial Undertaking Shifted

For industries relocating

Conditions:

1. Machinery/plant of industrial undertaking sold due to shift to backward area
2. Investment: Purchase new machinery/plant within 1 year before or 3 years after
3. New location: Must be backward area (government-notified)

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Section 54GA - Amalgamation/Demerger

Corporate restructuring exemption

Conditions:

1. Shareholder gets shares in new company (amalgamation)
2. Transfer: Original shares transferred
3. New shares valued at same cost as old shares

Effect: Defers capital gains (not eliminates)

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Section 54GB - Startup Investment

Encourage startup ecosystem

Conditions:

1. Asset sold: Residential property (held > 3 years)
2. Investment: Equity shares of eligible startup (within 6 months)
3. Limit: ₹50 lakh or capital gain (whichever lower)
4. Lock-in: Shares held 5 years, startup uses funds for purchase of new asset (not financial assets/vehicles)
5. Startup definition: Turnover < ₹100 crore, incorporated in India

Example:

Sold house: LTCG ₹60 lakh

Invested in startup equity: ₹50 lakh

• Exemption: ₹50 lakh (limit)
• Taxable: ₹10 lakh

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Capital Gains Account Scheme

If cannot invest immediately, deposit in Capital Gains Account:

Banks authorized: SBI, nationalized banks

Timeline: Deposit before due date of return filing

Withdrawal: Only for specified investment (new house/bonds/startup)

Benefit: Claim exemption even if haven't invested yet (deposited in CGAS)

Interest: Bank pays interest on deposit (~4%)

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Comparison of Major Exemptions

Section	Asset Sold	Investment	Limit	Lock-in
54	Residential house	New residential house	No limit	3 years
54F	Any (except house)	New residential house	Net consideration basis	3 years
54EC	Any LTCA	NHAI/REC bonds	₹50 lakh/year	5 years
54B	Agricultural land	New agricultural land	No limit	3 years
54GB	Residential property	Startup equity	₹50L or CG	5 years

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Practical Example - Multiple Exemptions

Mr. Kapoor sold house: LTCG ₹1 crore

Strategy 1 (Section 54): Buy house worth ₹1 cr → Full exempt

Strategy 2 (54 + 54EC):

• Buy house: ₹50 lakh (Section 54 exemption: ₹50L)
• Buy bonds: ₹50 lakh (Section 54EC exemption: ₹50L)
• Total exemption: ₹1 crore
• Tax: Nil

Cannot use both 54 and 54F together (54F excludes house sales)

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Reversal of Exemption

If conditions violated, exemption reversed!

Examples:

• Sell new house within 3 years (Section 54) → LTCG taxed in sale year
• Sell bonds before 5 years (54EC) → LTCG added to income in year of bond sale
• Startup doesn't use funds properly (54GB) → Exemption denied

Penalty: Interest + tax on capital gain in original year

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Key Points Summary

✅ Section 54: House → House (LTCG only, no limit, 3-year lock-in)

✅ Section 54F: Any asset (except house) → House (investment/consideration ratio)

✅ Section 54EC: Any asset → Bonds (₹50L limit, 6 months, 5-year lock-in)

✅ Section 54B: Agri land → Agri land (2-year timeline, 3-year lock-in)

✅ Section 54GB: House → Startup equity (₹50L limit, 5-year lock-in)

✅ CGAS: Capital Gains Account Scheme for interim deposit

✅ Lock-in violation: Exemption reversed, tax + interest payable

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Summary

• Section 54 series: 8 exemptions to save LTCG tax through reinvestment
• Section 54: Residential house → New house (full exemption if investment ≥ LTCG, 3-year lock-in)
• Section 54F: Any asset → House (proportionate exemption, must not own >1 house)
• Section 54EC: Any asset → Bonds (₹50L/year limit, 6-month timeline, 5-year lock-in)
• Section 54B: Agricultural land → New agri land (for farmers, 2-year purchase timeline)
• Section 54GB: Residential → Startup equity (₹50L limit, 5-year lock-in, encourage startups)
• CGAS: Capital Gains Account Scheme - deposit before return filing, withdraw for investment
• Violation: Sell within lock-in period → Exemption reversed, tax + interest

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Quiz Time! 🎯

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