Section 54G – Capital Gains Exemption in Cases of Shifting of Industrial Undertaking from Urban Area

Capital gains tax can be a significant financial burden for businesses undergoing restructuring or relocation. To incentivize the decentralization of industries from congested urban areas, the Indian Income Tax Act provides relief under Section 54G. This section allows exemptions on capital gains arising from the transfer of assets when an industrial undertaking shifts from an urban area to a non-urban area.

Understanding Section 54G

Section 54G offers a capital gains tax exemption to industries relocating their operations from an urban area to a non-urban area. The relief is available when capital gains arise from the sale of capital assets such as:

• Machinery or plant

• Building or land

• Rights in building or land

The exemption is applicable if the proceeds from the sale are reinvested in setting up the industry in the new location.

Eligibility Criteria for Exemption

To claim exemption under Section 54G, the assessee must fulfill the following conditions within 1 year before or 3 years after the date of transfer:

1. Purchase of new machinery or plant for business operations in the new location.

2. Acquisition of land or building or construction of a new building for business use.

3. Relocation of the original asset and complete establishment of the business in the new area.

4. Utilization of capital gains for expenses specified in a scheme framed by the Central Government.

Tax Treatment under Section 54G

The tax exemption under Section 54G follows these principles:

• If capital gains exceed the cost of the new asset, the remaining amount is taxed as capital gains.

• If capital gains are equal to or less than the cost of the new asset, the entire amount is exempt from tax.

• If the new asset is sold within 3 years, its cost will be considered zero for calculating capital gains.

Deposit Scheme for Unutilized Funds

If the assessee is unable to utilize the capital gains within the prescribed time, the unutilized amount must be deposited in a Capital Gains Account Scheme before filing the return under Section 139. The amount must be used for relocation expenses within 3 years. Otherwise, it will be taxed as capital gains in the year of expiry.

Key Benefits of Section 54G

1. Tax Savings – Reduces the capital gains tax liability significantly.

2. Encouragement for Industrial Decentralization – Promotes development in non-urban areas.

3. Increased Business Efficiency – Relocating industries can lead to lower operational costs and better expansion opportunities.

Conclusion

Section 54G provides a valuable opportunity for businesses planning to shift from urban to non-urban areas by offering tax exemptions on capital gains. However, to fully utilize this benefit, businesses must comply with the prescribed conditions and ensure timely reinvestment or deposit of capital gains.

For expert guidance on capital gains exemption and tax planning, consult a professional CA to maximize tax benefits and ensure compliance with income tax rules.