Capital gain exemptions – what are they applicable on and how are they applied?

This article is written by Aashish Ramchand, a Chartered Accountant by profession. Aashish is the co-founder of He also has completed his CFA Level I (American) and is very passionate about writing articles on taxes and tax advisory. He can be reached at

Capital Gains on assets are a result of a higher sale consideration than the cost of acquisition of the assets.

Short term capital gains are taxable at 15% in case of shares and equity oriented mutual funds and at 30% (maximum marginal rate) in case of other taxable assets.

On the other hand, long term capital gains on shares and equity oriented mutual funds are exempt from tax and are taxable at 20% in case of other assets such as flat, building, gold, art etc.

The Income tax act has come out with certain exemptions from taxable long term capital gains.

Section 54:- Under this section, an Individual or an HUF (Hindu Undivided Family) can get an exemption on the capital gains earned on residential house property. As per this section, the individual is required to purchase another residential house property within 1 year prior to the sale or within 2 years from the sale of the erstwhile residential house. In case of construction, the new residential house property must be constructed within 3 years from the sale of the original house property.

Section 54F:- As per this section, an individual or an HUF can get capital gains exemptions from assets other than residential house property (exemption for residential house property is covered under section 54). To claim the exemption, an individual or HUF needs to invest the sale proceeds of the old capital asset in another residential property. The timelines remain the same as covered in section 54 i.e. 1 year prior to or within 2 years from, the sale of the capital asset (other than the residential house property). In case of construction of the residential house property, the time limit is 3 years.

Section 54EC:- In this section, any person (not only individual and HUF’s) can get exemption from long term capital gains even if the capital gains are not invested in a residential house property. To gain exemption from capital gains, an individual or an HUF can invest the capital gains amount in NHAI (i.e. National Highway authority of India) or REC (Rural Electrification Corporation) bonds of the Government. The investment limit in these bonds in capped at Rs. 50 lakhs. The time limit to invest in these bonds is 6 months from the date of sale of the original capital asset.

Section 54B:– As per this section, an individual or HUF can get exemption from long term capital gains earned on sale of agriculture land. This pertains to sale of only urban agricultural land as sale of rural agriculture lands are completely exempt from tax. To claim the exemption, the assessee needs to invest the capital gains earned in another urban agricultural land. The time limit for investment is 2 years from the date of sale of the original urban agricultural land.