Section 54GB of Income Tax Act: Capital Gain Exemption for Investment in Eligible Company or Start-up
Section 54GB of the Income-tax Act, 1961 provided a capital gains exemption where an individual or Hindu undivided family transferred a long-term residential property and invested the net consideration in equity shares of a qualifying company, subject to the company acquiring specified new assets.
Meaning and purpose of Section 54GB
Section 54GB was introduced to encourage investment of sale proceeds from residential property into qualifying small or medium enterprises and, later, eligible start-ups. The provision operated by reducing or eliminating the capital gain otherwise chargeable under section 45 of the Income-tax Act, 1961 when its statutory conditions were satisfied.
The original asset had to be a long-term capital asset consisting of residential property, meaning a house or a plot of land, owned by an eligible assessee. The eligible assessee was restricted to an individual or Hindu undivided family (HUF).
Main conditions for exemption under Section 54GB
| Requirement | Section 54GB condition |
|---|---|
| Eligible taxpayer | Individual or HUF. |
| Original asset | Long-term capital asset being a residential property, namely a house or plot of land. |
| Investment by assessee | Net consideration had to be utilised for subscription to equity shares of an eligible company before the due date for furnishing the return under section 139(1). |
| Use by company | The eligible company had to utilise the subscribed amount to purchase a qualifying new asset within one year from the date of subscription. |
| Ownership in company | After subscription, the assessee had to hold more than 25 per cent share capital or more than 25 per cent voting rights in the eligible company. |
| Sunset | For investment in an eligible start-up, the qualifying transfer could not be made after 31 March 2022. |
How the exempt capital gain was calculated
Section 54GB(1) linked the exemption to the proportion of the net consideration effectively represented by the cost of the new asset.
Exempt capital gain = Capital gain × Cost of new asset ÷ Net consideration
If the cost of the new asset was equal to or greater than the net consideration, the whole qualifying capital gain was not charged under section 45. If the cost of the new asset was lower than the net consideration, only the proportionate capital gain qualified for exemption.
Deposit and utilisation requirements
Under section 54GB(2), where the eligible company had not used all of the share-subscription money to purchase the new asset before the assessee's return-filing due date, the unutilised amount had to be deposited before that due date in the prescribed account and used in accordance with the applicable scheme. The amount already used to purchase the new asset together with the amount properly deposited was treated as the cost of the new asset for this purpose.
The Central Government amended the Capital Gains Accounts Scheme, 1988 in 2012 to include section 54GB and an eligible company referred to in that section.
Withdrawal of exemption and lock-in
1. Amount not used for the new asset
If the amount deposited was not wholly used for purchasing the new asset within the one-year period prescribed by section 54GB(1), the exemption had to be recomputed by reference to the amount actually utilised. The resulting excess exemption became chargeable under section 45 for the previous year in which the one-year period from the share subscription expired.
2. Equity shares or new asset transferred too early
If the equity shares or the new asset acquired by the company were sold or otherwise transferred within five years from acquisition, the capital gain previously sheltered under section 54GB(1) was deemed to be the assessee's capital-gains income for the year of that transfer, in addition to the normal tax consequences of the later transfer.
For a qualifying new asset consisting of computer or computer software acquired by the specified technology-driven eligible start-up, the statutory lock-in for the new asset was three years instead of five years.
Important definitions under Section 54GB(6)
Eligible assessee
An eligible assessee meant an individual or a Hindu undivided family.
Eligible company
An eligible company was required, among other conditions, to be incorporated in India during the specified statutory period, carry on manufacture of an article or thing or an eligible business, satisfy the assessee ownership threshold, and qualify as a small or medium enterprise under the Micro, Small and Medium Enterprises Development Act, 2006 or as an eligible start-up.
Eligible start-up and eligible business
These expressions took their meanings from the Explanation below section 80-IAC(4) of the Income-tax Act, 1961.
Net consideration
Net consideration had the meaning assigned in the Explanation to section 54F. In practical terms, it referred to the full value of consideration received or accruing on transfer of the capital asset as reduced by expenditure incurred wholly and exclusively in connection with that transfer.
New asset
A new asset generally meant new plant and machinery. The definition excluded specified used machinery, machinery or plant installed in office premises or residential accommodation, office appliances including computers or software, vehicles, and assets whose whole actual cost was otherwise allowed as a deduction. A special proviso allowed computers or computer software for a qualifying technology-driven eligible start-up certified as prescribed.
Sunset date and position after 1 April 2026
Section 54GB(5) originally stopped the relief for transfers after 31 March 2017. The proviso extended the benefit for investment in an eligible start-up, ultimately substituting 31 March 2022 as the final date. Therefore, a transfer after 31 March 2022 could not generate a new Section 54GB exemption merely because the proceeds were invested in a start-up.
Practical checklist for an old Section 54GB claim
- Confirm that the residential property transfer fell within the statutory period applicable to the relevant category, including the 31 March 2022 sunset for eligible start-up investment.
- Confirm that the assessee was an individual or HUF and the original asset was a qualifying long-term residential property.
- Verify the date and amount of equity subscription and the return-filing due date under section 139(1).
- Verify the eligible company's incorporation, business, SME/start-up status and the assessee's post-subscription ownership or voting rights.
- Trace the company's purchase of the new asset within one year and any deposit of unutilised funds under the prescribed scheme.
- Check whether the shares or new asset were transferred during the applicable lock-in period.
Official resources
- Income Tax Department - Section 54GB statutory text
- Income Tax Department - Income-tax Act, 2025 transition FAQs
- CBDT Notification - Capital Gains Accounts (First Amendment) Scheme, 2012
This article is for legal and tax information. For a claim involving an earlier year, the statutory text applicable to that year, amendments, notifications and the facts of the case should be examined.