The Government of India initiates various development projects across the country to address infrastructure needs, promote economic growth, improve living standards, and sustainable development goals. To achieve these goals governments may exercise compulsory acquisition also known as eminent domain or compulsory purchase of land and buildings. Fair compensation for the land taken is provided to property owners which generates capital gains. To ease the burden of Tax on such gains an exemption under Section 54D of the Income Tax Act is provided to taxpayers. Thus, a taxpayer can claim a capital gain exemption on income from the compulsory acquisition of land or building forming part of an industrial undertaking.
When the government acquires rights in land through compulsory acquisition, the owner of such land is liable to pay tax on capital gains. Section 54D of the Income Tax Act grants an exemption for capital gains arising from the compulsory acquisition of land or buildings that are part of an industrial undertaking. Thus, a taxpayer can claim a capital gain exemption on income from compulsory acquisition if they invest such funds into land or building for shifting or reestablishing such industrial undertaking.
A taxpayer can claim a capital gain exemption on the compulsory acquisition of land or building forming part of an industrial undertaking under Section 54D if they satisfy all the below conditions:
The taxpayer can claim the Capital Gains Exemption under Section 54D while filing an ITR for that particular financial year. The taxpayer needs to file ITR-2 on the income tax website on or before the due date of 31st July.
The amount of exemption under Section 54D will be lower of the following:
Example: Akash purchased land for industrial undertaking in June 2004 for INR 3,50,000. The State government compulsorily acquired the property at a compensation of INR 13,00,000 in January 2024. Akash purchased another land for its industrial undertaking at INR 2,00,000 in March 2024. The amount of exemption under Section 54D will be:
| Particulars | Amount |
| Sale Proceeds | 13,00,000 |
| Less: Indexed cost of Acquisition (3,50,000 * 348/113) | (10,77,876) |
| Capital Gains | 2,22,124 |
| Cost of Acquisition of New Asset | 2,00,000 |
| Capital Gain exemption under Section 54D | 2,00,000 |
The lock-in period of 3 years is applicable. The following situations can arise:
When the taxpayer sells the new residential house within 3 years from the date of purchase or construction and the cost of the new house purchased is less than Capital Gains.
Consequences: They withdraw the exemption under Section 54D. The total sales value of the new house property will be taxable as capital gains. Here the cost of acquisition will be NIL.
When the taxpayer sells the new residential house within 3 years from the date of purchase or construction the cost of the new house purchased is more than Capital Gains.
Consequences: They withdraw the exemption under Section 54D. However, the taxpayer will be able to claim the cost of acquisition (Total Purchase Price – Exemption u/s 54D) while calculating capital gains.
When the taxpayer sells the new residential house after 3 years from the date of purchase or construction.
Consequences: They will not withdraw the exemption under Section 54D.The taxpayer will be able to claim the index cost of acquisition while calculating the capital gain on the sale of a new industrial undertaking. They must pay income tax on capital gains at the rate of 20%.
Under Section 54D, the taxpayer can take benefit of the CGAS Scheme to claim the exemption. If a taxpayer is unable to utilize the whole or part of the sales consideration for the purchase or construction of a new industrial undertaking till the due date of submission of ITR, they should deposit the funds in the Capital Gains Deposit Account Scheme (CGAS). The taxpayer can claim an exemption of the amount already spent on construction or purchase of property along with the amount deposited in CGAS. However, it is important to note that if the taxpayer is unable to utilise the amount deposited in the Capital Gains Account Scheme within the time limit of 3 years, then it shall be taxable as income of the last year.
Can I invest in the Capital Gains Account Scheme (CGAS) and claim an exemption under Section 54D? Yes. The benefit of the CGAS Scheme is available to claim a capital gain exemption under Section 54D. You can park your funds from compensation received on compulsory acquisition in the CGAS Scheme. You must later utilise this money for the purchase or construction of a new industrial undertaking within the time limit of 3 years.
My land was taken away under compulsory acquisition for road widening in return for compensation. Is this taxable? Capital Gains are exempt from tax for compensation received on compulsory acquisition of:
1) Urban agricultural land – exempt from income tax as per Section 10(37) of the Income Tax Act
2) Rural agricultural land – exempt from income tax since it is not a capital asset as per the Income Tax Act
3) Non-agricultural land – exempt from income tax as per the RFCTLARR Act and the CBDT Circular issued in 2016
Can we claim an exemption under section 54D for short-term Capital gain? Yes, the exemption is available even for short-term capital gains. Provided such asset is used by the assessee for the industrial undertaking even if they were not the owner of the property for a complete 2 years.
