Section 54D Exemption on Capital Gain (Compulsory Acquisition)

Under section 54D for exemption in Capital Gain (for compulsory acquisition of land or building of industrial undertaking) provides the benefits to the taxpayer to save tax by using exemption on capital gain.

For availing benefits in this section and saving tax you have to fulfill certain conditions related to this section.

In the following paragraph, we have explained in detail about Section 54D of Income Tax Act: 

What is exemption under section 54D of Income Tax Act?

This section was introduced to give the relief to those taxpayers who has to pay tax on capital gain arises upon compulsory acquisition of their land or building which is of industrial undertaking.

These taxpayers can now avail exemption under section 54D on fulfilling certain conditions.

Also Read: Capital Gain Tax on Sale of Property (Long Term / Short Term)

Who are eligible for availing exemption under section 54D?

The exemption under section 54D can be avail by all assessee means individual, HUF, Firm, AOP, BOI, Companies etc. all are eligible for availing exemption under this section.

 

What are the conditions to be fulfilled for availing exemption under section 54D?

Following are the conditions you need to fulfill for availing exemption under this section and can save your capital gain tax.

• This exemption is available only in case of compulsory acquisition of land or building of industrial undertaking and that land or building is used for the purpose of business undertaking for 2 years immediately preceding the date of transfer.
• Compulsory acquisition gain can be long term / short term gain. So this exemption is available in both the cases.
• Gain arising upon compulsory acquisition must be utilized (reinvested) in purchase of any other land or building OR constructing any building within 3 years after the date of transfer.
• And that new land or building must be for purposes of shifting or re-establishing.

Also Read: Section 54B: Capital gain Exemption on sale of agricultural land

What is the amount of exemption available under section 54D?

You are allowed to avail exemption to the extent of invested amount.

Example:

Mr. A gain is Rs.20 lakhs in compulsory acquisition. And if he invests whole Rs. 20 lakhs in purchase or construct of new land or building then he will avail exemption on full amount of Rs. 20 lakhs.

But exemption is available only to the extent of long term / short term capital gain.

Example:

In the above example if Mr. A spend Rs. 30 lakhs on purchase or construct of new land or building then he can avail exemption only the extent of capital gain i.e. Rs.20 lakhs only.

 

What is the provision of withdrawal of exemption under section 54D?

Under section 54D if you transfer the newly purchased/ constructed land or building within a period of 3 years then the exemption allowed earlier will be withdrawn (reversed) and your gain on such transfer is calculated after deducting exemption from cost of acquisition of such land or building.

Example:

Suppose Mr. B’s building is compulsorily acquired and he gets the gain of Rs. 20 lakhs from it. And for availing exemption he purchased a new building of Rs.50 lakhs and he got the exemption of Rs. 20 Lakhs.

Later on , he transfers the newly purchased building within 2 years for an amount of Rs. 80 Lakhs then in such case all the exemption allowed earlier will be reversed at the time of computing capital gain of transfer of the newly building.

Particulars	Amount Rs.
Full value of consideration (-) Cost of acquisition [50 lakhs – 20 lakhs ( exemption earlier allowed]	80 Lakhs (30 Lakhs)
Capital Gain	50 Lakhs

He has to pay capital gain tax on Rs. 50 Lakhs.

But if he holds the building till expiry of 3 years and transferred after 3 years then in such case his tax will be on Rs.30 lakhs (Rs. 80 lakhs – Rs. 50 lakhs).

Also Read: Section 54: Exemptions on capital gain on transfer of residential property

What capital gain account scheme 1988 under section 54D?

As per this provision, you have to invest (utilized) the gain arising from compulsory acquisition till the last date of filing of return otherwise you should deposit the same amount in capital gain account scheme 1988.

Then you can use such an amount for specific use only i.e. purchase / construct of land or building.

If you misutilize such an amount then it will become part of your short term / long term capital gain in the year of misutilisation.

If your amount remains unutilized till the expiry of 3 years then such amount will become the part of your short term / long term capital gain.

 

Summary

Section 54D of Income Tax Act provides exemption on capital gain tax in case of compulsory acquisition of land or building of industrial undertaking. By availing such exemption you can save your tax.