Exempt Capital Gains

Exemption under the head Capital Gains TABLE 4

Notes:

1. If the new asset is transferred, within a period of 3 years from the date of purchase/construction, the cost shall be reduced, in the year of transfer, by the gains exempted earlier.
2. If the gains are not reinvested as specified, before the due date of filing the return under section 139(1), then the amount not so reinvested is required to be deposited on or before that date in an account in a specified bank/institution and utilised for the purchase/construction of the relevant asset in accordance with the notified scheme within specified time limit in order to continue availing of the benefit of exemption [For the notified scheme, see 172 ITR (St.) 91].
3. Industrial land or building must have been used for the purposes of the business of the undertaking. New asset must be purchased/constructed for the purposes of shifting/re-establishing/setting up industrial undertaking.
4. The assessee must not own more than one residential house other than the new house on the date of the transfer of the original asset.
5. The assessee must neither purchase within 2 years after or construct within 3 years after the day of transfer, any other residential house other than the one in which reinvestment is made nor transfer the new asset within 3 years from the date of its acquisition/construction, otherwise the amount of gains earlier exempted shall be deemed to be LTCG in the year of such transfer.
6. The industrial undertaking must have been situated in an urban area and the transfer must have been effected as a result of shifting to a non-urban area.
7. The industrial undertaking must have been situated in an urban area and the transfer must have been effected as a result of shifting to a Special Economic Zone as defined in clause (za) of the Special Economic Zones Act, 2005.
8. ‘Foreign Exchange Asset’ means any of the assets listed in Note 9 below which assessee has acquired or purchased with, or subscribed to in convertible foreign exchange.
9. A ‘Specified Asset’ under Section 115F means :
   1. Shares in an Indian company;
   2. Debentures issued by Indian company which is not a private company;
   3. Deposits with an Indian company which is not a private company;
   4. Any security of the Central Government as defined in section 2(2) of the Public Debt Act;
   5. Other notified assets.
10. In case of compulsory acquisition of asset under any law, time for reinvestment or deposit in specified assets, of sale proceeds or capital gains as the case may be, as prescribed by sections 54, 54B, 54D, 54EC and 54F shall be reckoned from the date of receipt of compensation as per provisions of section 54H.
11. Board Circular No. 471 dated 15th October 1986 (162 ITR (St) 41) has clarified that cases of allotment of flats under the self-financing scheme of the Delhi Development Authority (DDA) should be treated as cases of ‘construction’ for the purposes of section 54 and 
    section 54F.

    Similarly, the Board Circular No. 672 dated. 16th December 1993 (205 ITR (St) 47) has clarified that allotment of flats/houses by co-op. societies and other institutions, whose schemes of allotment and construction are similar to those of DDA (as mentioned in para 2 of aforesaid Circular 
    No. 471), would be treated as ‘construction’ for the purposes of section 54 and Section 54F.

12. Board Circular No. 667 dated 18th October 1993 (204 ITR (St) 103) has clarified that for the purpose of computing exemption under section 54 or section 54F, the cost of the plot together with cost of the building will be considered as cost of new asset, provided the acquisition of the plot and also the construction thereon are completed within the period specified in these sections.
13. Where new asset is transferred within 3 years from date of its acquisition, or converted into money or any loan/advance is taken on securities of specified bond, the amount of gains earlier exempted shall be deemed to be LTCG in the year of such transfer or conversion.
14. Cost of specified asset shall not be considered for:
    • Rebate under section 88 up to A.Y 2005-06;
    • Deduction under section 80C from A.Y. 2006-07.
15. Where new asset is transferred within 3 years from date of its acquisition or converted into money or any loan/advances is taken on the security of specified assets, amount of gains earlier exempted shall be deemed to be LTCG in year of such transfer or conversion.
16. Where new asset is transferred within one year from date of its acquisition, amount of gains earlier exempted shall be deemed to be LTCG in the year of such transfer.
17. The benefit of exemption under Section 54B extended to HUF with effect from 1st April, 2013.
18. Under Section 54GB

18.1 “Eligible company” means a company which fulfils the following conditions, namely:—

It is a company incorporated in India during the period from the 1st day of April of the previous year relevant to the assessment year in which the capital gains arises to the due date of furnishing of return of income under sub-section (1) of section 139 by the assessee;

1. It is engaged in the business of manufacture of an article or a thing;
2. It is a company in which the assessee has more than 25% share capital or more than 25% voting rights after the subscription in shares by the assessee; and
3. It is a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 or from 1st April 2017 is an ‘eligible start up’;

18.2 “New asset” means new plant and machinery but does not include—

1. Any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;
2. Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;
3. Any office appliances including computers or computer software;
4. Any vehicle; or
5. Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or Profession” of any previous year.

18.3 As per the section, the amount of the net consideration, which has been received by the company for issue of shares to the assessee, to the extent it is not utilised by the company for the purchase of the new asset before the due date of furnishing of the return of income by the assessee under Section 139, shall be deposited by the company, before the said due date in an account in any such bank or institution as may be specified and shall be utilised in accordance with any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and the return furnished by the assessee shall be accompanied by proof of such deposit having been made

18.4 If the equity shares of the company or the new asset acquired by the company are sold or otherwise transferred within a period of 3 years from the date of their acquisition, the amount of capital gain arising from the transfer of the residential property which was not charged to tax, shall be deemed to be the income of the assessee chargeable under the head “Capital Gains” of the previous year in which such equity shares or such new asset are sold or otherwise transferred, in addition to taxability of gains, arising on account of transfer of shares or of the new asset, in the hands of the assessee or the company, as the case may be.

18.5 The exemption is available in case of any transfer of residential property made on or before 31st March, 2021.

18.6 The time period has been extended from 31st March, 2017 to 31 March 2019 in case the investment is made in an “eligible start-up”. (inserted by Finance Act, 2016 w.e.f. 1st April, 2017 [term “eligible start-up” – as defined in Explanation below Section 80-IAC(4)].

18.7 Section 54GB shall be effective from 1 April, 2013 and would accordingly apply from A.Y. 2013-14 and subsequent years.

NO TRANSFER FOR THE PURPOSES OF CAPITAL GAIN

Following transactions are not regarded as transfer for the purpose of Capital Gain (Section 47).

Distribution/Transfer of a Capital Asset

1. On total or partial partition of H.U.F. [Section 47(i)]
2. Under a gift/an irrevocable trust (except shares, debentures or warrants issued under ESOP/ESOS) or under a will [Section 47(iii)].
3. By a company to its Indian subsidiary company if parent company held all the shares of Indian subsidiary company [Section 47(iv)] (see notes 1 and 2).
4. By a subsidiary company to the Indian holding company if the Indian holding company held all the shares of the subsidiary company. [Section 47(v)] (see notes 1 and 2).
5. By the amalgamating company to the Indian amalgamated company in a scheme of amalgamation. [Section 47(vi)].
6. Being shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company in the scheme of amalgamation if [Section 47(via)]
   • At least 25% of shareholders of the first company remains shareholders of the later company, and
   • There is no capital gains tax on such transfer in the country of first company
7. A capital asset by a banking company to a banking institution in a scheme of amalgamation sanctioned and brought into force by the Central Government 
   under Section 45(7) of the Banking Regulation Act, 1949 [Section 47(viaa)].
8. (viab) Any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause (i) of sub-section (1) of Section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, if —
   1. At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and
   2. Such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated;
9. (vicc) Any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause (i) of sub-section (1) of Section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company, if,—
   1. The shareholders, holding not less than 3/4th in value of the shares of the demerged foreign company, continue to remain shareholders of the resulting foreign company, and
   2. Such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated:

      Provided that the provisions of Sections 391 to 394 of the Companies Act, 1956 shall not apply in case of demergers referred to in this clause.

10. By the demerged company to the resulting company if the resulting company is an Indian company 
    [Section 47(vib)].
11. Being share or shares held in an Indian company by the demerged foreign company to the resulting foreign company, if
    • The shareholders holding not less than 3/4th in the value of shares of the demerged foreign company continue to remain shareholders of the resulting foreign company.
    • There is no capital gains tax on such transfer in the country in which the demerged foreign company is incorporated [Section 47(vic)].
12. Transfer by a predecessor co-operative bank to a successor co-operative bank in a business reorganisation. 
    [Section 47(vica)].
13. Transfer of shares of a predecessor co-operative bank against shares of successor co-operative bank in a business reorganisation [Section 47(vicb)].
14. Transfer or issue of shares in case of a demerger to shareholders of demerged company by resulting company [Section 47(vid)] (In the case of a demerger, there is a requirement under Section 2(19AA)(iv) that the resulting company has to issue its shares to the shareholders of the demerged company on a proportionate basis. It is proposed to amend the provisions of Section 2(19AA) so as to exclude the requirement of issue of shares where resulting company itself is a shareholder of the demerged company. The requirement of issuing shares would still have to be met by the resulting company in case of other shareholders of the demerged company.)
15. Being shares held in the amalgamating company by a shareholder in a scheme of amalgamation against the allotment of shares in the Indian amalgamated company “except where the shareholder itself is the amalgamated company” [Section 47(vii)].
16. Being bonds or shares referred to in Section 115AC(1), made outside India by a non-resident to another non-resident. [Section 47(viia)].
17. Transfer of a rupee denominated bond of an Indian company issued outside India, by a non-resident to another non-resident outside India [Section 47(viiaa)].
18. Being bonds or Global depository receipt referred to in section 115AC(1) or rupee denominated bond of an Indian Company or derivative or such other securities as may pe notified by the Central Government in this behalf, by a non-resident on a recognised stock exchange located in any International Financial Services Centre and the consideration for the transaction is paid/payable in foreign currency. [section 47(viiab)]
19. Clause (viib) - Any transfer of a capital asset, being a Government Security carrying a periodic payment of interest, made outside India through an intermediary dealing in settlement of securities, by a non-resident to another non-resident.

    Explanation.—For the purposes of this clause, “Government Security” shall have the meaning assigned to it in clause (b) of Section 2 of the Securities Contracts (Regulation) 
    Act, 1956;

20. Clause (viic) (inserted by Finance Act, 2016) w.e.f. 1st April, 2017 - any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessee being an individual.
21. Being items of national importance specified in Section 47(ix) transferred to a University, National Museum, etc.
22. By conversion of bonds, debentures, etc. into shares or debentures of same company. [Section 47(x)].
23. Conversion of Foreign Currency Exchangeable Bonds referred to in Section 115AC(1)(a) into shares or debentures of any company [Section 47(xa)].
24. Conversion of preference shares of a company into equity shares of that company [Section 47(xb)]
25. Being membership of a recognised stock exchange, on or before 31st December, 1988, in exchange of shares by a person other than a company to a company “Membership of recognised stock exchange” is defined by Explanation to Section 47(xi).
26. Being land of Sick Industrial co., under a scheme of SICA 1985, where such company is managed by its workers co-operative. [Section 47(xii)].
27. Transfer of a capital asset where an AOP or a BOI is succeeded by a company in the course of demutualisation or corporatisation of a recognised stock exchange in India under a scheme approved by SEBI provided all the assets and liabilities of the AOP/BOI are taken over by the successor company [Section 47(xiii)].
28. Any transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor [Section 47(xvii)].
29. Explanation - For the purposes of this clause, the expression “special purpose vehicle” shall have the meaning assigned to it in the Explanation to clause (23FC) of Section 10.
30. Clause (xviii) – Any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund:

    Provided that the consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund.

    Amendment also made in Section 2(42A) whereby period of holding of the units of the consolidated scheme shall include the period for which the units in consolidating schemes were held by the assessee.

31. Sale/Transfer of any Capital Asset where a firm/Sole Proprietary Concern (SPC) is succeeded by a company provided given hereafter conditions are complied [Sections 47(xiii/xiv)].

    IMPORTANT CONDITIONS FOR FIRMS

    1. All partners become shareholders in ratio of capital.
    2. Aggregate shares of old partners not to reduce below 50% of the total voting power for minimum 5 years.
    3. All assets and liabilities are taken over by new company.
    4. Partners not to receive any benefit (other than shares) as a consideration.

    IMPORTANT CONDITIONS FOR SOLE PROPRIETARY CONCERN (SPC)

    5. Proprietor’s shares not to reduce below 50% for minimum 5 years.
    6. Conditions c & d of firms also applicable to SPC.
32. Clause (xix) inserted by Finance Act, 2016 – any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated plan of that scheme of the mutual fund.
33. Transfer of a membership right in a recognised stock exchange for acquisition of shares, and trading or clearing rights under a scheme of demutualisation or corporatisation approved by SEBI. [Section 47(xiiia)]
34. Sale/transfer of capital asset where a private company or unlisted public company is converted into a limited liability partnership (LLP) provided following conditions are fulfilled: (see notes 2 and 3.) (Section 47(xiiib)).

    IMPORTANT CONDITIONS FOR CONVERSION INTO LLPs

    1. All the assets and liabilities of the company before conversion are taken over by the new LLP.
    2. All the shareholders of the company immediately before conversion become the partners of the LLP. The profit sharing ratio and capital contribution are in the same proportion as their share holding in the company.
    3. The shareholders do not receive any additional benefit.
    4. Aggregate profit sharing ratio of the old shareholders not to reduce below 50% for minimum 5 years.
    5. The total sales, turnover or gross receipts of the company in any 3 years preceding the year of conversion do not exceed ₹60 lakhs.
    6. No amount is paid to the partners out of the accumulated profits as on the date of conversion for 3 years from the date of conversion.
    7. The total value of the assets as appearing in the books of account of the company in any of the 3 previous years preceding the previous year in which the conversion takes place does not exceed ₹5 crore rupees (inserted by Finance Act, 2016).
35. Transfer in a scheme of lending of any securities subject to the guidelines issued by SEBI, established under 
    Section 3 of SEBI Act, 1992 (15 of 1992) (or RBI constituted under Section 3(1) of the RBI Act, 1934) [Section 47 (xv)].
36. Transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the 
    Central Government [Section 47(xvi)] (retrospective from A.Y. 2008-09).
37. Section 46(1): Where assets of the company are distributed to the shareholders on liquidation of company, such distribution shall not be regarded as transfer by company.

Notes:

1. If there is any transfer of a capital asset as a stock-in-trade after 29th February 1998 then clauses (iii) and (iv) given above will not apply.
2. Please refer Section 47A for withdrawal of exemption in certain cases.