Section 54GB – Capital Gain exemption for investing in Startup

Section 54GB of the Income Tax Act provides an exemption from capital gains tax on the sale of a residential property if the proceeds are invested in an eligible business. This section encourages entrepreneurship by allowing individuals and Hindu Undivided Families (HUFs) to reinvest their gains in startups or small and medium enterprises (SMEs) instead of paying capital gains tax.

Definition of Important Terms

• Eligible Assessee: An individual or HUF.

• Eligible Company: A company incorporated in India meeting the following conditions:

  • Incorporated between the date of property transfer and the due date for filing the return.

  • Engaged in manufacturing or an eligible business.

  • The assessee holds at least 25% share capital or voting rights post-investment.

  • Falls under the MSME category or qualifies as a startup.

• New Asset: Includes new plant and machinery but excludes second-hand machinery, vehicles, and office appliances. However, for technology-driven startups, computers and software qualify as new assets.

Eligibility for Exemption

To claim exemption under Section 54GB:

• The capital gain must arise from the sale of a long-term residential property (house or plot of land) owned by an individual or HUF.

• The net consideration (sale proceeds) must be invested in the equity shares of an eligible company before the due date for filing the income tax return under Section 139(1).

• The eligible company must utilize this investment within 1 year for purchasing new assets.

Amount of Exemption

The exemption amount depends on the net consideration and cost of the new asset:

• If the net consideration is greater than the cost of the new asset: The exemption is proportional to the amount invested.

• If the net consideration is equal to or less than the cost of the new asset: The entire capital gain is exempt from tax.

Deposit of Unutilized Consideration

Any unutilized portion of the net consideration must be deposited in a designated bank account before the due date of filing the income tax return. The deposited amount must be used for purchasing a new asset within the prescribed period.

Conditions for Retaining the Exemption

• The eligible company must utilize the invested amount to purchase new assets.

• The equity shares of the company and the new asset acquired should not be sold or transferred within 5 years (three years for startups engaged in technology-based businesses).

Consequences of Non-Compliance

• If the amount deposited is not fully utilized for the purchase of new assets within the specified period, the proportionate capital gain becomes taxable.

• If the equity shares or new asset are sold within  5 years (or 3 years for startups), the exempted capital gain is added to the income of the relevant financial year and becomes taxable.

Conclusion

Section 54GB offers significant tax benefits to individuals and HUFs who sell residential property and reinvest in businesses. This provision not only helps in tax savings but also promotes entrepreneurship and economic growth in India. However, taxpayers must carefully comply with the conditions to ensure continued exemption from capital gains tax.