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Learn about Capital Gains Exemption, eligibility, rules, and how it works under the Income Tax Act.
Capital gains exemption allows individuals to reduce their tax liability on capital gains earned from the sale of assets. In India, various exemptions are available under different sections of the Income Tax Act. These exemptions apply when certain conditions are met, such as reinvesting capital gains into specified assets or holding assets for a long period.
Capital gains exemption is a tax relief available to taxpayers on the profit (capital gains) they make from the sale of certain assets, such as property, stocks, or bonds. The exemption reduces or eliminates the tax on capital gains, depending on whether specific conditions are met, such as reinvestment or the type of asset sold.
In India, the capital gains exemption is governed by provisions under the Income Tax Act. These exemptions apply when certain criteria are met, such as holding the asset for a prescribed period or reinvesting the capital gains into eligible assets. The most common exemptions are under sections like 54, 54F, and 54EC.
The following are the key rules for capital gains exemptions in India:
Available for individuals or Hindu Undivided Families (HUFs) who sell a residential property and reinvest the gains into another residential property
Available when long-term capital gains from the sale of any asset other than a residential property are reinvested in a new residential property
Available when long-term capital gains are invested in specified bonds (e.g., bonds issued by NHAI or REC)
The exemption is typically applicable only when the asset has been held for a specific period, generally more than 24 months for immovable property
Capital gains exemption limits vary depending on the asset and section under which the exemption is claimed. For instance:
The entire capital gain can be exempted if it is reinvested in a new residential property. However, the cost of the new residential property is capped at ₹10 Crore for exemption purposes. Any capital gain corresponding to the portion of the property cost above ₹10 Crore is taxable.
Exemption is limited to ₹50 Lakhs if the capital gain is invested in specified bonds, such as NHAI or REC bonds, within six months of the sale.
The exemption is proportionate to the amount of capital gain actually reinvested in a new residential property. There is no explicit ₹10 Crore cap under Section 54F.
In the case of selling shares, capital gains exemption is available under specific conditions:
If the shares are sold within one year of purchase, the gains are subject to tax at 15%.
If the shares are held for more than one year, the gains are exempt up to ₹1 Lakh per annum under Section 10(38), provided they are sold on recognised stock exchanges and Securities Transaction Tax (STT) is paid.
The following table explains the main Income Tax Act sections that allow capital gains exemption, based on the type of asset sold and reinvestment conditions:
| Section | Description | Conditions |
|---|---|---|
Section 54 |
Exemption on sale of residential property |
Reinvest capital gain in a new residential property within 2 years |
Section 54F |
Exemption on sale of any asset (other than residential property) |
Reinvest the entire capital gain in a new residential property |
Section 54EC |
Exemption for reinvestment in specified bonds |
Invest in bonds such as NHAI or REC bonds within 6 months of the sale |
The eligibility to claim capital gains exemption depends on the following:
Exemptions are generally available to individuals or HUFs
The asset must be held for a specific period to qualify for long-term capital gain treatment
In most cases, the capital gain must be reinvested in eligible assets or bonds to claim the exemption
To claim capital gains exemption, follow these steps:
Include the details of capital gains and the exemptions claimed in the appropriate section of the ITR
Submit documents showing that the capital gain has been reinvested in a new property or bonds
Ensure you claim the exemption under the correct section (54, 54F, 54EC) of the Income Tax Act
An individual sells a residential property for ₹50 Lakhs and reinvests ₹50 Lakhs in a new residential property. They can claim full exemption under Section 54, since the cost of the new property is below the ₹10 Crore cap.
Note: If the new property’s cost exceeds ₹10 Crore, the exemption is limited to the portion of capital gain corresponding to ₹10 Crore.
A person sells bonds and invests the proceeds in NHAI bonds under Section 54EC. They can claim exemption up to ₹50 Lakhs, which is the maximum limit for this section.
Some common mistakes to avoid when claiming capital gains exemption:
Failing to hold an asset for the prescribed time period
Not submitting the required documents, such as proof of reinvestment in new property or bonds
Claiming exemption under the wrong section or for ineligible assets
Capital gains exemption is a valuable tool for reducing tax liability on the sale of assets. The main takeaways are:
Exemptions are available under different sections of the Income Tax Act, such as Sections 54, 54F, and 54EC
Capital gains exemption requires the reinvestment of the gains in eligible assets or bonds
Understanding the rules and eligibility criteria is important for maximising exemptions and minimising tax liability
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Capital gains exemption is a tax relief available on the profit earned from the sale of certain assets, provided certain conditions are met, such as reinvesting the gains.
Individuals or Hindu Undivided Families (HUFs) who meet the conditions specified under the Income Tax Act are eligible to claim capital gains exemption.
The limit varies depending on the section used to claim the exemption. For example, Section 54EC allows exemption up to ₹50 Lakhs.
Yes, long-term capital gains on the sale of shares are exempt up to ₹1 Lakh per annum under Section 10(38), provided the conditions are met.
Sections 54, 54F, and 54EC of the Income Tax Act offer exemptions on capital gains under specific conditions.
You can claim capital gains exemption by filing the appropriate documents and proofs, such as evidence of reinvestment, while filing your Income Tax Return.
Yes, capital gains exemption is often available if the gains are reinvested in specified assets or bonds, such as residential property or NHAI bonds.
Documents such as proof of asset sale, reinvestment receipts, and relevant bank statements are required to claim the exemption.
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