A complete guide for a taxpayer on Capital Gains Exemption

“What is Capital Exemption?”, Long Term Capital Gain Exemption, and information of Sections for Capital Gain Tax Exemption


Capital gains may result from the sale of capital assets, and these gains maybe taxed under the Income Tax Act. A few capital gains exemptions/deductions are available to help you save money on your capital gains. As a result, one must plan benefits while taking into account all potential legal solutions. In this article information such as “What is Capital Exemption?”, Long Term Capital Gain Exemption, and information of Sections for Capital Gain Tax Exemption is mentioned.

What is Capital Gains Exemption?

The term “capital gains exemption” refers to a benefit provided by the government to taxpayers that relieves them of the requirement to pay capital gains tax. The requirement to pay capital gains tax occurs when a taxpayer sells an asset for a profit (other than personal belongings and stock utilized in the business). As a result, taxpayers who are going to buy or sell a capital asset must pay close attention to the tax implications of the transaction.


Taxpayers who understand the various provisions of the Income Tax Act and related Capital Gains Exemptions might benefit from lower tax rates. The amount of income tax to be paid on capital gains in relation to the transfer of capital assets carried out by the assessee is directly related to the duration of holding a capital asset and the various expenses and other deductions to be claimed for arriving at the final quantum of taxable capital gains. As a result, all taxpayers should be aware of the applicable capital gains exemptions when purchasing or selling capital assets.

Information of Sections for Capital Gain Tax Exemption

  • Section 54G

Gain deriving from the transfer of land, a structure, or machinery to relocate an urban undertaking to a rural location is exempt. The exemption is available if the profit is used to buy land, a building, or machinery in a rural region.

  • Section 54GA

Gains from the transfer of land, buildings, or machinery from an urban area to a Special Economic Zone are exempt from taxation if the profit is reinvested to buy land, buildings, or machinery in the Special Economic Zone.

  • Section 54GB

The long-term capital gain on the sale of a residential property on March 31, 2017 is exempt. The capital gain must be used to purchase equity shares in a company that qualifies.

  • Section 54D

Gain originating from the government’s acquisition of industrial property or buildings is exempt from taxation. Prior to the acquisition, the asset should have been used for industrial purposes for at least two years. The gain must be reinvested to acquire land or a building for industrial purposes in order to qualify for the exemption.

Long Term Capital Gain Emptions

  • LTCG Tax Exemptions on Investment in House Property

If taxpayers sell any type of capital asset (other than a residential house), such as shares, a plot of land, commercial assets, commercial house property, jewellery, and so on, and reinvest the gains in a residential house property, they can take advantage of the long-term capital gains exemption under Section 54F. This capital gains exemption is only available to taxpayers who do not own a residential property at the time the capital asset is transferred.


The net selling earnings from the sale of a capital asset must be invested entirely within the following categories:

  • Within two years of the transfer of ownership of a residential housing property.
  • One year in advance of the transfer.
  • In the event of a residential house property, the sale earnings can be invested within three years.

Taxpayers who use this provision to avoid capital gains must not acquire or build another residential dwelling or flat within one year of the original capital asset’s transfer, or within three years of the original capital asset’s transfer. In addition, the new residential house purchased has a three-year lock-in period. As a result, the newly purchased home should not be sold or transferred within three years. If the capital gain is transferred before the three-year period, the entire gain is taxed in the year of the sale.

  • LTCG Tax Exemptions on Sale of House Property

If the entire amount of long-term capital gains is utilized to purchase another residential house property, taxpayers participating in selling a residential house after owning it for a minimum of three years can enjoy capital gains exemption. To qualify for this capital gains exemption, the taxpayer must reinvest the proceeds from the sale of a primary residence within a particular time frame, as follows:

  1. Within two years of the residential property transfer.
  2. In such instances, the new dwelling property shall be built within three years of the transfer of residential property.
  3. Within a year, in anticipation of a residential property transfer.

To be eligible for a complete long-term capital gain exemption, the entire long-term capital gain from the sale of the first residential home property must be re-invested. If a taxpayer does not re-invest the entire long-term capital gain, the portion that is not re-invested is subject to long-term capital gains tax.


Furthermore, any long-term capital gain that is not used at the time of filing an income tax return must be deposited with a bank under a Capital Gains Account Scheme, and the receipt must be attached to the income tax return. The taxpayer can withdraw the amount of unutilized capital gain that has been put in the bank under the programme as and when needed. However, the funds must be used in full during the two-year term following the transfer of the first residential housing property. The time allocated for the construction of a new house will be three years instead of two.


Any profit or gain resulting from the transfer of a capital asset will be charged to the capital gain in the year of the transfer. If your capital gain is less than 2 crores, you can invest in two residential properties and claim an exemption under section 54 if all other conditions regarding Capital Gain Tax are fulfilled by the taxpayer. Please keep in mind that an assessee can only use this option once.

Zarana Mehta: Zarana Mehta is an MBA in Finance from Gujarat Technology University. Though having a masters degree in Business Administration, her upbeat and optimistic approach for changes led her to pursue her passion i.e. Creative writing. She is currently working as Content Writer at Ebizfiling.
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