Section 54GB of the Act, provides for exemption of capital gain which arises from the transfer of a long-term capital asset, being a residential property (a house or a plot of land), owned by the eligible assessee if Net Consideration is Invested in the Equity Shares of a new Start-up SME Company.
Text of Section 54GB
[1][54GB. Capital gain on
transfer of residential property not to be charged in certain cases
(1) Where,-
(i) the capital gain arises from the transfer of a
long-term capital asset, being a residential property (a house or a plot of
land), owned by the eligible assessee (herein referred to as the assessee); and
(ii) the assessee, before the due date of
furnishing of return of income under sub-section (1) of section 139, utilises
the net consideration for subscription in the equity shares of an eligible
company (herein referred to as the company); and
(iii) the company has,
within one year from the date of subscription in equity shares by the assessee,
utilised this amount for purchase of new asset,
then, instead of the capital gain
being charged to income-tax as the income of the previous year in which the
transfer takes place, it shall be dealt with in accordance with the following
provisions of this section, that is to say,-
(a) if the amount of the
net consideration is greater than the cost of the new asset, then, so much of
the capital gain as it bears to the whole of the capital gain the same
proportion as the cost of the new asset bears to the net consideration, shall
not be charged under section 45 as the income of the previous year; or
(b) if the amount of the
net consideration is equal to or less than the cost of the new asset, the
capital gain shall not be charged under section 45 as the income of the
previous year.
(2) 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.
(3) For the purposes of sub-section
(1), the amount, if any, already utilised by the company for the purchase of
the new asset together with the amount deposited under sub-section (2) shall be
deemed to be the cost of the new asset:
PROVIDED that if the amount so
deposited is not utilised, wholly or partly, for the purchase of the new asset
within the period specified in sub-section (1), then,-
(i) the amount by which -
(a) the amount of
capital gain arising from the transfer of the residential property not charged
under section 45 on the basis of the cost of the new asset as provided in
sub-section (I) , exceeds—
(b) the amount that
would not have been so charged had the amount actually utilised for the
purchase of the new asset within the period specified in sub-section (1) been
the cost of the new asset,
shall
be charged under section 45 as income of the assessee for the previous year in
which the period of one year from the date of the subscription in equity shares
by the assessee expires; and
(ii) the company shall be entitled
to withdraw such amount in accordance with the scheme.
(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 five years from the date of their acquisition,
the amount of capital gain arising from the transfer of the residential property
not charged under section 45 as provided in sub-section (1) shall be deemed to
be the income of the assessee chargeable under the head”Capita1 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:
[2][PROVIDED
that in case of a new asset, being computer or computer software, acquired by
an eligible start-up referred to in the proviso to clause (d) of sub-section
(6), the provisions of this sub-section shall have effect as if for the words
“five years”, the words “three years” had been substituted].
(5) The provisions of this section
shall not apply to any transfer of residential property made after the 31st day
of March, 2017:
[3][PROVIDED
that in case of an investment in eligible start-up, the provisions of this
sub-section shall have the effect as if for the figures, letters and words
“31st day of March, 2017”, the figures, letters and words “31st day of March, [4][2022]had
been substituted];
(6) For the purposes of this
section,—
(a) “eligible assessee”
means an individual or a Hindu undivided family;
(b) “eligible company”
means a company which fulfils the following conditions, namely:-
(i) 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 gain arises to the due date of
furnishing of return of income under sub-section (1) of section 139 by the
assessee;
(ii) it is engaged in
the business of manufacture of an article or a thing [3][or
in an eligible business];
(iii) it is a company in
which the assessee has more than [5][twenty-five] per cent share
capital or more than [5][twenty-five] per cent voting rights after
the subscription in shares by the assessee; and
(iv) it is a company
which qualifies to be a small or medium enterprise under the Micro, Small and
Medium Enterprises Act, 2006 (27 of 2006) [3][or
in an eligible business;]
[3][(ba)
“eligible start-up” and “eligible business” shall have the meanings
respectively assigned to them in Explanation below sub-section (4) of section
80-IAC];
(c) “net consideration”
shall have the meaning assigned to it in the Explanation to section 54F;
(d) “new asset” means
new plant and machinery but does not Include -
(i) any machinery or plant which, before its
installation by the assessee, was used either within or outside India by any
other person;
(ii) any machinery or
plant installed in any office premises or any residential accommodation,
including accommodation in the nature of a guest-house;
(iii) any office
appliances including computers or computer software;
(iv) any vehicle; or
(v) 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:
[3][PROVIDED
that in the case of an eligible start-up, being a technology driven start-up so
certified by the Inter-Ministerial Board of Certification notified by the
Central Government in the Official Gazette, the new asset shall include
computers or computer software.]
KEY NOTE
1. Inserted by the
Finance Act, 2012, with effect from 01.04.2013.
2. Inserted by the
Finance (No. 2) Act, 2019, with effect from 01.04.2020.
3. Inserted by the
Finance Act, 2016, with effect from 01.04.2017.
4. Substituted for
“2021” by the Finance Act, 2021, with effect from 01.04.2021.
5. Substituted for
“fifty" the Finance (No. 2) Act, 2019, with effect from 01.04.2020.
Who can claim exemption?
Only Individual and Hindu Undivided
Family (HUF) can claim exemption Which original asset is qualified for
exemption? (i.e., Capital gains arising from transfer of)
The capital gain arises from the
transfer of a long-term capital asset, being a residential property (house or a
plot of land) owned by the eligible assessee, i.e., individual and HUF.
Assets to be acquired for exemption
(i.e. Investment to be made)
The sale consideration shall be
invested in the equity shares of a new start-up Small and Medium Enterprises
(SME) company in the manufacturing company. In turn the company must utilize
the amount for the purchase of new plant and machinery.
NOTE
1.
With effect from 01.04.2017, eligible start-up is also included in definition
of ‘eligible company’.
2.
The eligible company should utilize the amount of subscription for purchase of
new assets (i.e., plant and machinery except vehicle, office appliances,
computer or computer software etc.). However, In the case of eligible start-up,
the new asset shall include computers or computer software.
Conditions
to be satisfied for availing tax relief in respect of capital gains by
investment in shares of a company which is “Eligible start-up”
The exemption under section 54GB
shall be allowed if the following conditions are satisfied :—
(i) There should be a long-term gain from the
transfer of a residential property (i.e., a house or plot of land) owned by the eligible assessee
(i.e., individual or Hindu undivided family).
(ii) Such
long-term capital gain should arise to an individual or HUF.
(iii)
Transfer of such long-term capital
asset should be made on or before 31.03.2022
(iv) The company should be engaged in the business
of manufacture of an article or a thing.
(v) The assessee will not be able to transfer
the above shares for a period of 5 years.
(vi) The above new plant and machinery acquired by
the company cannot be sold for a period of 5 years.
(vii) The amount of net consideration is used by the
individual or HUF before the due date of furnishing of return of income under
section 139(1), for subscription in equity shares in the Small and Medium
Enterprises (SME) company in which he holds more than 25% share capital or more
than 25% voting rights.
(viii) The amount of
subscription as share capital is to be utilized by the Small or Medium
Enterprises (SME) company for the purchase of new plant and machinery within a
period of one year from the date of subscription in the equity shares by the
assessee.
(ix) If the amount of net consideration subscribed
as equity shares in the Small and Medium Enterprises (SME) company is not
utilized by the Small and Medium Enterprises (SME) for the purchase of plant
and machinery before the due date of filing of return by the individual or HUF,
the utilized amount shall be deposited under the deposit scheme to be
prescribed in this behalf.
(x) Investment in eligible
start-up which is LLP will not qualify for section 54GB relief.
Period
during which exemption available
Residential properties transferred
between 01.04.2012 and 31.03.2022 are eligible for exemption under section
54GB.
Time limit
for acquiring the new assets
(a) Investment by the assessee -
Before due date for furnishing of return under Section 139(1).
(b) Investment by the company - purchase
new asset within 1 year from date of subscription in
equity shares by the
assessee.
E.g.: In the aforesaid case, Mr. X is required to subscribe in the equity
shares of an eligible
company within the due date of furnishing income tax return for the
relevant assessment
year (i.e. 31.07.2024 assuming his accounts are not liable for audit). If
Mr. X has subscribed
in equity capital of eligible company on 15/12/2023, then company should
acquire new
asset within 1 year from 15.12.2023
Amount of
exemption available under section 54GB
The amount of exemption available
under section 54GB is as under :
|
Particulars |
Amount of exemption |
|
If entire net consideration is
invested |
Entire capital gain would be
exempt |
|
If the cost of new asset is less than net sale
consideration of the transferred asset |
Proportionate capital gain would be exempt in following manner - (investment in new asset * capital gain)/ net consideration. |
“Net
Consideration”
Full value of consideration (-) any
expenditure exclusively incurred on account of transfer.
“New
Asset” means
The term ‘new asset’ means new
plant and machinery. However, the term ‘new asset’ does not include the
following —
(i) The plant or
machinery being installed in any office premises or any residential
accommodation (including accommodation in guest house).
(ii) The plant or
machinery which has been used prior by any other person within or outside
India.
(iii) Any type of
vehicle.
(iv) Any type of office
appliances (including computer or computer software).
(v) The plant or
machinery where whole of the actual cost is allowed as deduction in computing
the income chargeable under the head ‘Profit and gains of business or
profession’ of any previous year.
Eligible
company
The company that satisfies the
following conditions is termed as ‘eligible company’-
(i) The company should have been incorporated in
India.
(ii) The company should
have been incorporated during the previous year in which the capital gain has
arisen to the subsequent financial year up to the due date of furnishing of the
income-tax return.
E.g.: If Mr. X has
transferred his residential property as on 10.08.2023, then company should be
incorporated between 01.04.2023 and due date of furnishing return under section
139(1) by Mr. X (i.e. 31.07.2024 assuming his accounts are not liable for
audit).
(iii) The company is
engaged in the business of manufacturing of an article or a thing or in an
eligible business; and
(iv) The company in
which the assessee has more than 25% (50% upto 31.03.2019) share capital or
more than 25% voting rights after the subscription in equity shares by the
assessee.
(v) The company should
qualify to be a medium or small enterprise under the Micro, Small and Medium
Enterprises Act, 2006 or the same is an eligible start-up.
|
Enterprises |
Investment in Plant
& Machinery |
|
Micro Enterprises |
Does not exceed Rs.
25,00,000 |
|
Small Enterprises |
More than Rs.
25,00,000 but does not exceed Rs. 5,00,00,000 |
|
Medium Enterprises |
More than Rs.
5,00,00,000 but does not exceed Rs. 10,00,00,000 |
Points
to Remember while Investing in SMEs under Section 54GB
Here are some points that an individual must keep in mind while investing
in SMEs under Section 54GB:
(a)
The investment
must be made only in equity shares of eligible SMEs.
(b)
The SME must
utilize the funds raised from the sale of equity shares for the purpose of
expanding its business.
(c)
The investment
in eligible SMEs must be made within six months from the date of sale of the
residential property.
(d)
The equity
shares of the SMEs must be held for a minimum period of five years to be
eligible for tax exemption under Section 54GB.
(e)
Investment limit
: The maximum amount that can be invested in eligible SMEs is Rs. 50 lakh. Any
investment made above this limit will not be eligible for tax exemption under
Section 54GB.
Eligible
Business means [Explanation below section 80-IAC(4)]
“Eligible business” means a business carried out by an eligible start-up
engaged in innovation, development or improvement of products or processes or
services or a scalable business model with a high potential of employment
generation or wealth creation;
What is an
eligible start up? [Explanation below section
80-IAC(4)]
A company
or a LLP which satisfied the following conditions and is engaged in above
mentioned eligible business
(a)
It is incorporated on or after 01.04.2016 but before
01.04.2024
(b)
Total turnover does not exceed 100 crore in the
previous year
(c)
It holds a certificate of eligible business from the
Inter-Ministerial Board of Certification as notified by the Central Government.
In order to claim exemption under
section 54GB, the claimant is required to re-invest the amount within a period
of one year from the date of transfer. However, if the amount is not invested
within the due date of filing of the income-tax return, then, the claimant is
required to deposit the amount into the ‘Capital Gain Deposit Account Scheme’,
1988.
The amount so deposited into the
account needs to be utilized for subscription in equity shares within the
prescribed time. However, if the amount is not utilized within the given
period, the unutilized amount would be taxable in the previous year in which
the time period expires.
Withdrawal
of exemption if equity shares in company or new asset acquired by company is
sold or transferred within a period of 5 years (or 3 years for computer and
software) from date of acquisition
If the equity shares of the company
or the new asset acquired by the company are sold or otherwise transferred
within a period of five years (or 3 years for computer and software) from the
date of their acquisition, the amount of capital gain arising from the transfer
of the residential property not charged as provided under section 45(1) 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 the new asset, in the hands of the assessee or
the company, as the case may be.
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