Smart Tax Relief with Section 54D: Capital Gains Exemption for Industrial Land and Buildings

The Income Tax Act provides taxpayers a way to avoid paying tax on capital gains if they use the profit from selling a property or asset to buy certain approved new assets. This income tax exemption can be claimed using different sections, such as Section 54, Section 54B, Section 54D, Section 54EC, Section 54EE, Section 54F, Section 54G, Section 54GA, Section 54GB, etc. Each section covers a specific type of investment or situation where you can get this tax relief.

In this article, we will discuss how one can avoid paying capital gains tax using Section 54D of the Income Tax Act. Exemption on capital gain can be claimed using Section 54D when land or a building used for an industrial purpose is compulsorily acquired by the government or any other legal authority. Meaning if the government forces an industrial business to transfer its land or building for public purposes, like for building roads, dams, etc., and the business makes a profit or gain from this transaction, that capital gain can be exempt from tax under certain conditions. This exemption can be claimed on both short-term and long-term capital gains resulting from the compulsory acquisition of land or buildings for public purposes. 

For this exemption to be made applicable, the land or building that is being transferred by the taxpayer should be used for the purpose of running an industrial business for at least 2 years before the date of compulsory acquisition.  After the transfer of land or building, the taxpayer must purchase or construct another land or building within 3 years from the date of compulsory acquisition. The purpose of buying this new land/building should be to either move the existing business or start a new one to qualify for the exemption.

The amount of exemption that will be awarded to the taxpayer under Section 54D will be whichever is lower of the following two:

• The actual capital gain made from the compulsory acquisition, or
• The amount spent on purchasing or constructing the new land or building (including any amount deposited in the Capital Gains Account Scheme).

If the assessee is not able to invest the capital gains amount in purchasing or constructing a new property before the due date of filing their income tax return, they can still claim the exemption by depositing the unutilized amount into a special account called the Capital Gains Account Scheme (CGAS). This account is specifically made for such cases and allows the assessee to keep the capital gain amount aside safely until they are ready to use it.

The taxpayer must then use the money deposited in the Capital Gains Account Scheme to buy or construct the new property within 3 years from the date of compulsory acquisition. If they are unable to do this and the remaining money is unused after 3 years, the unutilized amount will be taxed as capital gain in the year when the 3-year period ends. This means the exemption will be cancelled for that unused portion, and tax will be charged on it as if it were income in that year.

Also, there is one more case when the exemption can be taken back or reversed. If the assessee sells the new land or building that they bought or constructed for the purpose of shifting the business within 3 years of purchase or construction, the earlier exemption granted under Section 54D will also be withdrawn. In such a case, while calculating the capital gain on the sale of this new property, the amount of exemption claimed earlier will be reduced from the cost of the new asset. This will increase the capital gain amount and result in more tax.

Finally, this exemption under Section 54D is available to all categories of taxpayers, which means it can be claimed by individuals, companies, firms, or any other person who fulfils the above conditions.