[Section 54GB]- Exemption of Long-Term Capital Gains on Investment in Manufacturing SME

Section 54GB of the Income Tax Act, 1961, provides tax exemption on long-term capital gains (LTCG) from the sale of a residential property, if the proceeds are reinvested in the equity shares of an eligible manufacturing SME (Small or Medium Enterprise). This provision aims to promote investment in India’s manufacturing sector while offering tax relief to individuals/HUFs 15.

1. Key Eligibility Conditions

✅ Applicable to: Individuals or HUFs selling a residential property (house or plot) held for >24 months.

✅ Investment Requirement:

• Net sale proceedsmust be invested in equity shares of an eligible SME before the ITR filing due date.
• The SME must use the funds to purchase new plant/machinerywithin 1 year of share subscription.

✅ SME Criteria:

• Registered under the MSME Act, 2006.
• Engaged in manufacturing/production(not trading/services).
• The investor must hold ≥25% voting rights or share capitalpost-investment.

2. Exemption Calculation

The exemption is the lower of:

• Capital gain from the property sale, or
• Amount invested in the SME’s equity shares.

Example:

• LTCG from property sale: ₹80 lakh
• Investment in SME shares: ₹60 lakh
• Exemption: ₹60 lakh (remaining ₹20L taxable at 20% with indexation).

3. Lock-in Period & Withdrawal Conditions

• 5-year lock-infor equity shares and new plant/machinery.
• If sold earlier:
  • Exemption is revoked, and the original LTCG becomes taxable.
  • Gains from the sale of shares are taxed separately (STCG/LTCG based on holding).

4. Compliance & Documentation

✔ File ITR-2/ITR-3: Declare exemption under “Capital Gains”.

✔ Proof Required:

• SME’s MSME certificateand share subscription proof.
• Purchase invoicesfor new plant/machinery.

5. Comparison with Other Exemptions