A Complete Guide on Section 54GB of Income Tax Act

What is Section 54GB of the Income Tax Act?

Section 54GB of the Income Tax Act is a provision that provides tax benefits to individuals or Hindu Undivided Families (HUFs) who invest capital gains from the sale of a residential property into eligible start-ups. This provision aims to promote entrepreneurship, support innovation, and foster the growth of start-ups in India. Under Section 54GB, taxpayers can claim an exemption from long-term capital gains tax on the sale of residential property if the proceeds are reinvested in eligible start-ups within the specified timeframe. The provision sets conditions for eligibility, including the requirement that the start-up must be recognised by the Department of Industrial Policy and Promotion (DIPP) and fulfil certain criteria.

Important terms to understand for Section 54GB

Here are some of the important terms to know under Section 54GB of the Income Tax Act:

• Section 54 GB: Refers to a specific provision under Indian tax laws.
• Long-term capital gains: Profits earned from the sale of assets held for more than a specified period.
• Residential property: A dwelling where an individual resides or intends to reside.
• Investment in specified assets: Funds utilised for purchasing certain assets as defined by the law.
• Exemption: Relief from paying taxes on specified gains or income.
• Time limit: The duration within which actions must be taken to qualify for benefits under Section 54GB.
• Conditions: Criteria that must be met to avail of the tax benefits provided by this section.

What are the benefits of Section 54GB?

The primary benefits of Section 54GB include:

1. Exemption from capital gains tax: Taxpayers can claim an exemption from long-term capital gains tax on the sale of residential property if the proceeds are reinvested in eligible start-ups within the specified timeframe.
2. Promotion of entrepreneurship: By providing tax incentives, Section 54GB encourages individuals to invest in start-ups, thereby fostering entrepreneurship and innovation in the country.
3. Support for start-ups: The provision offers financial support to start-ups by attracting investments from individuals or Hindu Undivided Families (HUFs), facilitating their growth and development.
4. Economic growth: By promoting investment in start-ups, Section 54GB contributes to economic growth by creating job opportunities, driving innovation, and stimulating overall business activity.
5. Alignment with government initiatives: Section 54GB aligns with the government's initiatives to promote start-ups and entrepreneurship, such as the start-up India program, by incentivising investment in the start-up ecosystem.

What are the conditions applicable to claim exemption under Section 54GB?

To claim exemption under Section 54GB of the Income Tax Act, taxpayers must adhere to the following conditions:

1. Sale of residential property: The residential property sold must be a long-term capital asset held by the taxpayer or Hindu Undivided Family (HUF).
2. Investment in eligible start-ups: The sale proceeds from the residential property must be utilized for subscribing to equity shares of an eligible start-up within the prescribed timeframe.
3. Eligibility of start-up: The start-up in which the investment is made must be recognised by the Department of Industrial Policy and Promotion (DIPP) and fulfil the specified criteria.
4. Timeframe for investment: Taxpayers must invest the sale proceeds into eligible start-ups within the specified timeframe as per the provisions of Section 54GB.
5. Duration of holding: The equity shares acquired in the eligible start-up must be held by the taxpayer or HUF for a minimum period as specified under Section 54GB to avail of the exemption.
6. Compliance with other provisions: Taxpayers must comply with all other relevant provisions of the Income Tax Act and any regulations prescribed by the government regarding investments in start-ups and claiming exemptions under Section 54GB.

By meeting these conditions, taxpayers can avail themselves of the exemption provided under Section 54GB and defer the tax liabilities on capital gains from the sale of residential property invested in eligible start-ups.

What is the amount of exemption available to claim under Section 54GB?

Under Section 54GB, taxpayers can claim an exemption from long-term capital gains tax on the sale of residential property. The entire amount of capital gains is exempt if the sale proceeds are invested in eligible start-ups within the specified timeframe.

Withdrawal of exemption under Section 54GB of the Income Tax Act

Withdrawal of exemption under Section 54GB of the Income Tax Act occurs when certain conditions are not met or when the taxpayer fails to comply with the provisions of the section. The exemption claimed under Section 54GB will be withdrawn in the following circumstances:

1. Non-compliance with holding period: If the taxpayer sells or transfers the equity shares acquired in the eligible start-up within a specified period from the date of their acquisition, the exemption claimed under Section 54GB will be withdrawn. The holding period is usually five years from the date of acquisition of the equity shares.
2. Non-utilization of sale proceeds: If the taxpayer fails to invest the sale proceeds from the sale of the residential property into eligible start-ups within the prescribed timeframe, or if the investment is not made as per the conditions specified under Section 54GB, the exemption may be withdrawn.
3. Failure to meet other conditions: If the taxpayer does not meet any other conditions or requirements specified under Section 54GB or fails to comply with the provisions of the Income Tax Act related to investments in start-ups and claiming exemptions, the exemption may be withdrawn.

In case of withdrawal of exemption under Section 54GB, the capital gains arising from the sale of the residential property will become taxable in the hands of the taxpayer in the year in which the exemption is withdrawn. It is essential for taxpayers to ensure compliance with all conditions and requirements specified under Section 54GB to avoid withdrawal of the exemption and potential tax liabilities.

How to avail of deductions under Section 54GB

To avail of deductions under Section 54GB, taxpayers must follow these steps:

• Identify an eligible start-up recognised by the DIPP.
• Reinvest the sale proceeds from the residential property into subscribing to equity shares of the eligible start-up within the prescribed timeframe.
• Ensure compliance with all conditions and requirements specified under Section 54GB to claim the exemption successfully.

In conclusion, Section 54GB of the Income Tax Act serves as a catalyst for promoting investment in start-ups and fostering entrepreneurial ventures. By providing tax incentives to individuals willing to invest in the start-up ecosystem, including provisions like capital gains exemptions and deductions, this provision contributes to the growth and development of innovative enterprises. Utilising an income tax calculator can help investors assess potential savings and benefits, ultimately driving economic prosperity and job creation in the country.

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