Section 54D: Capital Gains Exemption on Compulsory Acquisition of Industrial Land or Buildings

Section 54D of the Income-tax Act, 1961 provides conditional capital gains relief when land, a building or rights in either, forming part of an industrial undertaking, are compulsorily acquired and the taxpayer reinvests in qualifying replacement assets.

Meaning and scope of Section 54D

The provision covers capital gains from a compulsory acquisition under law of land, building or any right in land or building forming part of an industrial undertaking. The asset must have been used by the taxpayer for the business of that undertaking throughout the two years immediately preceding the transfer. Relief is available to any category of assessee, including individuals, firms and companies, where all conditions are met.

Eligibility conditions

1. The original asset must be land, building or rights in land or building forming part of the taxpayer's industrial undertaking.
2. It must have been used for the undertaking's business during the two years immediately before compulsory acquisition.
3. The transfer must be by compulsory acquisition under a law, not merely an ordinary voluntary sale.
4. Within three years after the date of transfer, the taxpayer must purchase replacement land, building or rights therein, or construct another building.
5. The new asset must be used to shift or re-establish the existing industrial undertaking or establish another industrial undertaking.

How much capital gain is exempt?

The exemption is limited to the lower of the eligible capital gain and the qualifying cost of the replacement asset, including eligible amounts deposited under the notified Capital Gains Accounts Scheme (CGAS), subject to subsequent actual utilisation.

Illustrative calculation

Suppose an industrial building is compulsorily acquired, resulting in an eligible capital gain of Rs. 80 lakh. The taxpayer invests Rs. 55 lakh in a qualifying replacement building within the prescribed period. Subject to the other conditions, relief is Rs. 55 lakh and the remaining Rs. 25 lakh is taxable. If the qualifying investment is Rs. 90 lakh, the relief cannot exceed the Rs. 80 lakh capital gain.

Capital Gains Accounts Scheme: Section 54D(2)

If the eligible gain has not been used to purchase or construct the replacement asset before filing the income-tax return, the unutilised amount must be deposited in the notified scheme before filing the return and no later than the due date under Section 139(1). Under the corresponding 2025 Act, the relevant return provision is Section 263. The amount spent plus the qualifying deposit is taken into account for computing relief.

If a deposited amount remains unutilised when the three-year reinvestment period ends, that unutilised amount becomes chargeable as capital gains in the year in which the period expires, and withdrawal is governed by the scheme.

Sale of the replacement asset within three years

Section 54D(1) contains a special cost-adjustment mechanism for the replacement asset if it is transferred within three years of purchase or construction. If the original gain exceeded the replacement cost, the replacement asset's cost is treated as nil for this computation. Otherwise, the cost is reduced by the capital gain previously sheltered. This is distinct from simply reversing the exemption.

Original statutory provisions: Section 54D(1) and (2)

Sub-section (1): Compulsory acquisition and reinvestment

The original law provides relief where land, building or rights in either forming part of an industrial undertaking, used for its business for the preceding two years, are compulsorily acquired, and qualifying replacement property is acquired or constructed within three years for shifting, re-establishing or setting up an industrial undertaking. Clause (i) taxes the capital gain exceeding the cost of the new asset and prescribes nil cost on a transfer of that asset within three years. Clause (ii) shelters gains up to the new asset cost and reduces the cost of the new asset by the sheltered gain if it is transferred within three years.

Sub-section (2): Deposit of unutilised capital gain

The amount not utilised before filing the return is required to be deposited in the notified account scheme by the statutory due date. Deposits and expenditure together are considered for relief. Any deposit remaining unutilised after the three-year period is taxable in the year that period expires, and may be withdrawn under the scheme.

Related legal provisions and definitions

Section 45, Income-tax Act, 1961: The general charging provision for capital gains. Section 139(1): Prescribes the ordinary due date for furnishing returns, relevant to CGAS deposits. Section 155(10): Contains provisions relevant to amendment of assessments involving compulsory acquisition and qualifying reinvestment, including enhanced compensation, where applicable. Under the Income-tax Act, 2025, corresponding capital gains and return provisions include Sections 67 and 263.

Legislative history

Section 54D was inserted by the Finance Act, 1973 (Act 21 of 1973), effective 1 April 1974. It was numbered as sub-section (1) by the Finance Act, 1978 (Act 19 of 1978), with effect from 1 April 1974. The Finance Act, 1987 (Act 11 of 1987) amended the opening wording and substituted sub-section (2), effective 1 April 1988. The Finance Act, 1978 also inserted the reference to the original asset. The former Explanation was omitted by the Finance Act, 1992 (Act 18 of 1992), effective 1 April 1993.

Official references

• Income Tax Department: Section 54D statutory text
• Income Tax Department: Capital gains and exemptions
• Income Tax Department: Section 155
• Income Tax Department e-filing portal

Updated 25 October 2026. This article is general legal information. Eligibility, applicable tax year, compensation dates and the correct statutory regime should be verified for individual cases.