What are the Rules Regarding Exemption of Capital Gains?

The taxation of capital gains can be mitigated through various exemptions provided under the Income Tax Act, 1961. These exemptions apply to both Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG), depending on specific conditions. To know what are the rules regarding exemption of capital gain, read the below details.

Important Rules Regarding Exemption of Capital Gains

Here’s an overview of the key rules regarding the exemption of capital gains:

• Section 54 (Exemption on Sale of Residential Property): If you sell a residential property and invest the proceeds in another residential property, you can claim an exemption on the capital gains. 

• The new property must be purchased within one year before or two years after the sale. Alternatively, if you construct a new property, it must be completed within three years.

• Section 54F (Exemption on Sale of Any Capital Asset): This section applies when the sale of a capital asset other than a residential property is involved. The entire sale proceeds must be invested in a residential property to claim full exemption. If only part of the proceeds is invested, the exemption will be proportionate.

• Section 54EC (Investment in Bonds): Under this provision, you can claim exemption by investing the capital gains in specified bonds (such as those issued by NHAI or REC) within six months of the sale. The maximum exemption available is up to ₹50 lakhs.

• Section 10(38) (Exemption on LTCG from Listed Shares): Long-term capital gains on the sale of listed equity shares and equity-oriented mutual funds are exempt up to ₹1 lakh in a financial year. Gains exceeding this limit are taxed at 12.5%.

To avail of these exemptions, it is crucial that you meet all stipulated conditions. I hope you find this answer helpful.

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Hey.

I am a Financial Advisor and what I have come to know over the years is that many people are not aware of certain simple financial terms too until they actually have to deal with it or anything related to it. But I always advise all my clients to keep brushing up their financial knowledge because it is all you require to lead an economically healthy lifestyle. But one such very common term which people tend to be unaware of is capital gains and evidently remain unaware of the exemption under capital gain. I am going to tell you in detail about it.

Capital Gains

The profit or gain obtained from the selling of an asset is known as capital gain. The amount gained from the sale of assets that exceeds the purchase price is referred to as capital gains. Short-term capital gain and long-term capital gain are two types of capital gain.

What are the rules regarding exemption of capital gains?

The rules regarding exemption of capital gains or the exemptions a taxpayer can claim are as follows:

1. According to Section 54 of the IT Act, if the taxpayer is an individual or a member of a Hindu Undivided Family, capital gain obtained as a result of the transfer of a long-term asset such as a building, land, or even a residential house is exempted if the taxpayer decides to buy another property within a year or two years, or if he builds another residential house in India within three years after the transfer, he will not be charged capital gain tax. 

2. The conditions for obtaining exemptions by an individual or a HUF are discussed in Section 54B of the IT Act. Only agricultural land is available for sale in this sector. The agricultural land must have been used for agricultural purposes for at least two years prior to the date of the individual's transfer. 

3. Sec 54EC of the IT Act states that if a taxpayer invests the capital gain in long-term designated bonds issued by NHAI, REC, or the central government for a duration of at least three years within six months of the sale date/transfer date, the capital gain is exempt up to Rs.50 lakhs.

4. Taxpayers are exempt from capital gains for the transmission of any capital asset other than a residential house if the net consideration is re-invested in the buying of one residential building within the year before the transfer or within two years after the transfer, according to Section 54F of the IT Act. 

I hope you have a fairly good idea about exemption under capital gain now.