Section 54D of ITA, 1961 : Section 54D: Capital Gain On Compulsory Acquisition Of Lands And Buildings Not To Be Charged In Certain Cases

Explanation using Example

Let's consider Mr. Sharma owns an industrial unit with land and a building that he uses for his manufacturing business. The government decides to build a highway and compulsorily acquires Mr. Sharma's land and building. He receives a compensation of ₹1 crore, which results in a capital gain of ₹60 lakhs after considering the indexed cost of acquisition.

Mr. Sharma decides to reinvest the entire compensation amount into purchasing a new piece of land and constructing a new building for relocating his industrial unit. He completes this purchase and construction within 3 years of the compulsory acquisition and spends ₹80 lakhs on it.

According to Section 54D:

• If the capital gain (₹60 lakhs) is less than the cost of the new asset (₹80 lakhs), Mr. Sharma will not have to pay tax on the capital gain. For the purpose of any future sale of the new asset within 3 years, the cost base for calculating capital gains tax would be reduced by the amount of the capital gain exempted (₹60 lakhs).

However, let's say Mr. Sharma only spent ₹40 lakhs on the new asset. In that case:

• The difference between the capital gain (₹60 lakhs) and the cost of the new asset (₹40 lakhs), which is ₹20 lakhs, would be taxable as income from capital gains in the year of transfer of the original asset.

If Mr. Sharma had not immediately reinvested the capital gain but intended to do so within 3 years, he would need to deposit the unutilized amount into a specified account before the due date of his income tax return to claim the exemption.

If he fails to utilize the deposited amount for the purchase or construction of the new asset within 3 years, then:

• The unutilized amount would be taxed as capital gains in the year the 3-year period ends.
• Mr. Sharma could then withdraw the unutilized funds.