Section 54D of the Income Tax Act, 1961, provides tax exemption on capital gains arising from the compulsory acquisition of land or buildings used for industrial purposes, if the proceeds are reinvested in new industrial assets.
1. Eligibility Conditions
✅ Asset Type: Land or building used for industrial/business purposes (factory, warehouse, etc.).
✅ Acquisition Type: Must be compulsorily acquired by the government (not voluntary sale).
✅ Holding Period:
- Long-Term Capital Asset (LTCG): Held for >24 months(20% tax with indexation).
- Short-Term Capital Asset (STCG): Held for ≤24 months(taxed at slab rates).
✅ Reinvestment Window: Must purchase new land/building or construct a new industrial asset within 3 years from the date of compensation receipt.
2. Exemption Calculation
The exemption is the lower of:
- Capital gain from the sale, or
- Amount reinvested in new industrial assets.
Example:
- Compensation Received: ₹1.5 Crore
- Indexed Cost (purchased in 2015): ₹80 Lakh
- Capital Gain: ₹70 Lakh
- New Industrial Property Purchased: ₹90 Lakh
- Exemption: ₹70 Lakh (full gain exempt).
3. Key Conditions & Restrictions
✔ Lock-in Period: The new asset cannot be sold within 3 years (else exemption is revoked).
✔ Usage Requirement: The new property must be used for industrial/business purposes.
✔ Capital Gains Account Scheme (CGAS): If unable to reinvest within 3 years, deposit proceeds in a CGAS account (must be utilized within 3 years).
4. Comparison with Other Exemptions
| ASPECT | SECTION 54D (INDUSTRIAL LAND/BUILDING) | SECTION 54 (RESIDENTIAL PROPERTY) | SECTION 54EC (BONDS) |
| Asset Type | Industrial land/building | Residential house | NHAI/REC bonds |
| Reinvestment Time | 3 years | 2 years (purchase) / 3 years (construction) | 6 months |
| Lock-in Period | 3 years | 3 years | 5 years |
| Tax Rate if Not Reinvested | 20% (LTCG) / Slab (STCG) | 20% (LTCG) / Slab (STCG) | 20% (LTCG) |
5. Compliance & Documentation
✔ Disclose in ITR-3/ITR-4 (for businesses).
✔ Proof Required:
- Compensation order(government acquisition notice).
- Purchase/construction proofof new industrial property.
- Bank statements(if using CGAS).
6. Recent Changes (2024 Budget)
- LTCG Tax Rate: Reduced from 20% (with indexation)to 5% (without indexation) for sales after 23rd July 2024.
- TDS Exemption: No TDS on compulsory acquisition payments.
