Section 54EE of ITA, 1961 : Section 54Ee: Capital Gain Not To Be Charged On Investment In Units Of A Specified Fund

Explanation using Example

Let's consider a hypothetical scenario to understand the application of Section 54EE of the Income-tax Act, 1961:

Suppose Mr. Sharma sold a piece of land that he had held for more than 3 years (a long-term capital asset) for INR 80 lakhs, resulting in a capital gain of INR 30 lakhs. To save on capital gains tax, he decides to invest INR 30 lakhs into a long-term specified asset, which is a unit of a fund notified by the government, within 6 months of selling the land.

According to Section 54EE:

• If Mr. Sharma invests the entire capital gain of INR 30 lakhs into the specified asset, then the entire capital gain will not be charged under section 45, meaning he won't have to pay tax on the capital gains from the sale of his land.
• However, if he had only invested INR 20 lakhs, then the exemption would be proportionately applied. So, only the proportion of the capital gain that corresponds to the amount invested (20/30) would not be taxed.
• It is also important to note that if Mr. Sharma's investment exceeds INR 50 lakhs in a financial year, or if the total investment in the financial year of the sale and the subsequent financial year exceeds INR 50 lakhs, the benefit of this section will be capped at INR 50 lakhs.
• If Mr. Sharma decides to sell the long-term specified asset within 3 years of its purchase, the benefit availed under this section would be reversed, and the capital gains from the original asset sale would then be subject to tax in the year the specified asset is sold.

This section thus provides Mr. Sharma with a pathway to defer taxation on his capital gains by investing in specified assets, provided he adheres to the conditions laid out in Section 54EE.