Capital Gains Tax Exemptions under the Income Tax Act: When and How Much is Exempt?
Capital gains taxation in India is a critical component of personal and corporate income tax compliance. Whether you’ve sold a house, transferred shares, or disposed of land, understanding how capital gains are taxed and when they are exempted can significantly impact your financial planning.
This article offers a comprehensive guide on when and to what extent capital gains are exempted under the Income Tax Act, 1961, based on current tax laws and provisions.
What is Capital Gain?
Capital gain refers to the profit or gain arising from the transfer of a capital asset. Capital assets include:
- Land
- Buildings
- Stocks and bonds
- Gold and jewelry
- Mutual funds
- Patents and trademarks
Capital gains are classified into two types based on the holding period:
- Short-Term Capital Gain (STCG): Asset held for a short period (e.g., less than 24 months for real estate)
- Long-Term Capital Gain (LTCG): Asset held for a longer period (e.g., more than 24 months for real estate, 12 months for listed securities)
Tax rates differ for each. LTCG generally enjoys indexation benefit and lower tax rates.
Why are Capital Gains Exempted?
While capital gains are generally taxable, the government provides exemptions to encourage reinvestment in housing, business, agriculture, and infrastructure. These exemptions allow taxpayers to save taxes by reinvesting the proceeds from capital assets in specific forms.
Let’s explore the major exemptions available under the Income Tax Act.
Major Capital Gain Exemption Provisions under Income Tax Act, 1961
1. Section 54 – Sale of Residential House Property
Who can claim?
Individual or HUF
Condition:
Capital gains from sale of long-term residential house must be reinvested in another residential house in India.
Extent of exemption:
- Up to the amount invested in the new property
- Max 2 residential houses allowed if capital gain is up to ₹2 crore (once in a lifetime option)
Time limit for reinvestment:
- Purchase: within 1 year before or 2 years after the sale
- Construction: within 3 years after the sale
2. Section 54F – Sale of Any Long-Term Capital Asset Other Than House Property
Who can claim?
Individual or HUF
Condition:
Entire net sale consideration (not just gain) must be invested in a new residential house in India
Extent of exemption:
Full exemption if entire sale consideration is reinvested. Partial if only part is invested.
Restriction:
You must not own more than one residential house (other than the new one) at the time of transfer.
3. Section 54EC – Capital Gains from Land or Building
Who can claim?
Any person (individual, firm, company, etc.)
Condition:
Capital gain should arise from the sale of a long-term land or building.
Reinvestment option:
Invest the capital gain in specified bonds (REC, NHAI) within 6 months.
Extent of exemption:
Up to ₹50 lakh in a financial year
Lock-in period:
5 years (from FY 2018-19 onward)
4. Section 54B – Capital Gains from Sale of Agricultural Land
Who can claim?
Individual or HUF
Condition:
Land should be used for agriculture in the last 2 years prior to sale.
Reinvestment:
In another agricultural land in India
Time Limit:
Purchase within 2 years
Extent of exemption:
Up to the amount invested in new agricultural land
5. Section 10(37) – Compulsory Acquisition of Agricultural Land
Who can claim?
Individual or HUF
Condition:
Capital gains arising from compulsory acquisition of urban agricultural land by the government
Extent of exemption:
Entire capital gain is exempt
Additional requirement:
Compensation must be received after April 1, 2004
6. Section 54D – Industrial Land or Building Used for Business
Who can claim?
Any person
Condition:
Compulsory acquisition of industrial land or building used for business
Reinvestment:
In another industrial asset within 3 years
Extent of exemption:
Up to the amount invested
Common Conditions Across Exemptions
- Capital Gain Account Scheme (CGAS):
If the investment is not made before filing ITR, the unutilized amount must be deposited in a Capital Gains Account Scheme to claim exemption. - Holding Period:
The new asset acquired must be held for minimum 3 years (2 years for some exemptions). If sold earlier, exemption is withdrawn.
Practical Example
Ramesh, a salaried individual, sold his ancestral house in 2023 and made a long-term capital gain of ₹50 lakh. He reinvested ₹40 lakh in a new flat within 1 year. He can claim exemption of ₹40 lakh under Section 54, and pay LTCG tax only on the remaining ₹10 lakh.
Recent Updates
- From FY 2023–24, maximum deduction allowed under Section 54 and 54F is capped at ₹10 crore.
- Capital gains on equity shares (LTCG above ₹1 lakh) are taxed at 10% without indexation (Section 112A)
Mnemonic :
Mnemonic to Remember Exemptions – “54 FAMILY BEADS”
| Letter | Section | Description |
|---|---|---|
| F | 54F | Sale of any LT asset for buying house |
| A | 54 | Sale of house – reinvest in house |
| M | 54EC | Bonds – REC/NHAI |
| I | 10(37) | Compulsory acquisition of agri land |
| L | 54B | Sale of agricultural land |
| Y | 54D | Industrial land/building acquisition |
