Section 54G Income Tax Act: Capital Gains Exemption on Shifting an Industrial Undertaking

Section 54G of the Income-tax Act, 1961 provided capital gains relief where an industrial undertaking shifted from a notified urban area to a non-urban area and the capital gain was used for specified relocation assets and expenses. From 1 April 2026, the corresponding provision is Section 87 of the Income-tax Act, 2025.

What did Section 54G cover?

Section 54G applied where a capital gain arose from transferring specified business assets of an industrial undertaking situated in an urban area, and the transfer took place in the course of, or as a consequence of, shifting that undertaking to an area other than an urban area.

The relief was not restricted to long-term capital gains. It could apply to short-term or long-term capital gains, subject to the statutory conditions. The benefit was available to any assessee satisfying those conditions.

Meaning of urban area

For Section 54G, an urban area meant an area within the limits of a municipal corporation or municipality that the Central Government declared to be an urban area for this purpose, having regard to factors such as population, concentration of industries and planning requirements. The relevant notification and the location of the undertaking should therefore be checked for the period concerned.

Main conditions for claiming the exemption

• The original asset must have been used for the business of an industrial undertaking situated in a qualifying urban area.
• The transfer must have occurred in the course of, or because of, shifting the industrial undertaking from that urban area to a non-urban area.
• The original asset may be machinery, plant, building, land, or rights in a building or land used for the industrial undertaking.
• The assessee must incur qualifying expenditure within the permitted period: one year before or three years after the date of transfer.
• Any amount not utilised by the applicable return-filing stage must be dealt with under the prescribed Capital Gains Accounts Scheme requirements.

Which investments and expenses qualify?

The capital gain may be applied towards one or more of the specified purposes connected with the shifting of the industrial undertaking:

How is the exemption calculated?

The practical ceiling is the amount of qualifying investment and expenditure. If the qualifying cost is less than the capital gain, only that cost is sheltered and the balance remains chargeable as capital gain. If the qualifying cost equals or exceeds the capital gain, the capital gain can be fully sheltered, subject to compliance with the provision.

Capital Gains Accounts Scheme and unutilised capital gain

Under Section 54G(2), the portion of the capital gain not already appropriated towards qualifying expenditure and not utilised before furnishing the return had to be deposited in the prescribed account before furnishing the return and, in any event, not later than the due date applicable under Section 139(1). The amount already utilised plus the amount properly deposited was treated as the cost of the new asset for this purpose.

If the deposited amount was not wholly used for the qualifying purposes within the permitted three-year period, the unutilised portion became chargeable as capital gain in the previous year in which that three-year period expired, subject to the applicable statutory framework.

What if the new asset is transferred within three years?

Section 54G contained a three-year adjustment rule for the new asset. Where the original capital gain exceeded the qualifying cost, the provision treated the cost of the relevant new asset as nil for computing capital gain on a transfer within three years. Where the original capital gain was equal to or less than the qualifying cost, the cost of the new asset was reduced by the amount of capital gain sheltered under Section 54G. This mechanism effectively recaptured the earlier benefit on an early transfer.

Current position from 1 April 2026: Section 87 of the Income-tax Act, 2025

The Income-tax Act, 1961 was repealed for the new tax-law framework from 1 April 2026. The corresponding provision for exemption on shifting an industrial undertaking from an urban area to a non-urban area is now Section 87 of the Income-tax Act, 2025. For a transaction or tax year beginning on or after 1 April 2026, the current Act and the rules made under it should be checked rather than relying only on the old Section 54G numbering.

For tax years beginning before 1 April 2026, pending assessment, appeal, reassessment, rectification, penalty and other preserved proceedings may continue under the Income-tax Act, 1961 in accordance with the repeal and savings provisions. This is why Section 54G remains important for historical transactions and litigation even after the change in statute.

Related provisions

Section 54G operated with the capital gains charging provisions and the return/deposit rules. For older cases, also consider Section 54H where the transfer involves compulsory acquisition and the statutory extension of time may be relevant. For shifting to a Special Economic Zone under the old Act, see Section 54GA.

Official resources

Income Tax Department - Capital Gains guidance
Income Tax Department - Section 54G text under the Income-tax Act, 1961
Income Tax Department e-Filing portal

Updated: 28 September 2026. This article is a general legal and tax information resource. For a transaction-specific claim, verify the applicable tax year, statutory text, notifications, rules and facts.