Capital Gain Exemption

When individuals sell their assets, they are required to pay capital gains tax on the profits earned. The tax rates differ based on the duration for which the assets were held, either as short-term or long-term. To provide tax relief and to encourage investment in assets with potential long-term appreciation, the Income Tax Act provides specific exemption options. These Capital Gain Exemptions, as outlined under section 54, allow taxpayers to reduce their tax liability when filing their Income Tax Returns, and provide them with opportunities to benefit from tax savings.

• What is Capital Gain Exemption?
• List of Capital Gain Exemption
• Capital Gains Account Scheme
• How to report Exemption in ITR?
• FAQs

What is Capital Gain Exemption?

The Income Tax Department provides capital gain tax exemptions to taxpayers through section 54. This section allows taxpayers to potentially avoid paying taxes on profits earned from the sale of certain assets if they reinvest in eligible assets. The section lists various assets that are eligible for reinvestment. Hence, if a taxpayer invests in these assets within the given timeframe, they can claim either partial or complete exemption on their capital gains. However, it is essential to note that these exemptions cannot exceed the total capital gains amount.

List of Capital Gain Exemption

– Purchased 1 year before or 2 years after the sale of a property

– Purchased 1 year before or 2 years after the sale of a property

– An investment made within 6 months of the sale of an asset

– Purchased within 2 years from the sale of land

– Purchase within 3 years from the date of receipt of compensation

– Specified securities include Government Securities, Savings Certificates, Units of UTI, Specified Debentures, etc

– The investment amount can not be more than Rs. 50 lakhs

– Purchased within 1 year before and 3 years after the sale of assets

– Purchased within 1 year before and 3 years after the sale of assets

Key features to keep in mind while claiming an exemption

• Section 54F
  • On the date of transfer of LTCA, the taxpayer should not own more than one residential house
  • They should not purchase any other house within 2 years or construct within 3 years after the date of transfer
  • If the above conditions are not satisfied then exempt CG will be taxable in a year in which such other residential house is purchased or constructed
    
  • If the taxpayer takes any loan or advance on the security of bonds/units, they shall be deemed to have converted into money on the date on which such loan or advance is taken and capital gain exempted earlier shall be taxable.
    
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  Capital Gains Account Scheme

  The Capital Gains Account Scheme (CGAS) allows taxpayers to hold funds temporarily to claim capital gain exemptions. By opening a CGAS account, taxpayers can reduce their capital gains tax by investing in specified assets. If unable to invest before the ITR filing deadline, they must deposit funds into a CGAS account to qualify for exemption. This scheme applies to various sections such as Sections 54, 54B, 54D, 54EE, 54F, 54G, 54GA, and 54GB.

  How to report Exemption in ITR?

  When filing an ITR, taxpayers must provide details of their investments in specific sections to claim capital gain exemptions. If the taxpayer has temporarily deposited the amount of the gain in a CGAS, they also need to include these details in ITR.

  Here are the steps to disclose the capital gain exemption while filing an ITR

  Navigate to the Schedule Capital Gains Under this schedule, select the appropriate income sources. Then on the next screen click on Add Details under option D – Information about Deductions Claimed Against Capital Gains.

  

  Add the Section of deduction claimed On clicking add details, there will be a drop-down menu for selecting the section of capital gain deduction. Under this, the taxpayer has to select the appropriate section under which they are claiming the deduction.

  

  Enter the details of the amount invested Once the section is selected, the taxpayer needs to enter the required details of the investment.
  For example, if the taxpayer has invested long-term gains of any asset in residential property, then it will be reported u/s 54F.

  

  FAQs

  How to claim an exemption if we wish to buy the house property next year?

  Taxpayers can claim exemption u/s 54, 54F depending on the asset sold. An exemption can be claimed by depositing the amount in the CGAS. They can claim an exemption by depositing the amount in the CGAS. However, they must deposit it before the due date of filing their ITR. And claim the same as an exemption while filing an ITR.

  Can we claim exemptions on the sale of Short-Term Capital Asset(STCA)?

  The taxpayer can claim exemption u/s 54B and 54G on Short Term Capital Asset. However, all the other exemptions are available on Lond Term Capital Asset.

  What are the documents required as proof of investment while claiming exemption?

  While filing an ITR, the taxpayer only needs to enter the exemption section, the purchase date, and the value. However, it is important to keep the purchased assets documents on record for future use.