Section 54G: Capital Gains Exemption on Shifting an Industrial Undertaking
Section 54G of the Income-tax Act, 1961 provided capital-gains relief when an industrial undertaking shifted from a qualifying urban area to a non-urban area and reinvested in eligible business assets or incurred prescribed relocation expenditure. The provision is designed to support industrial decentralisation, subject to strict conditions and deadlines.
What is Section 54G?
Section 54G concerns capital gains on transfer of specified assets used in an industrial undertaking situated in an urban area, where the transfer occurs in the course of, or because of, shifting the undertaking to an area other than an urban area. It does not provide an automatic exemption merely because an industrial property is sold.
Eligibility and conditions
- Original assets: machinery, plant, building, land or rights in a building or land used for the business of the industrial undertaking in the relevant urban area.
- Qualifying relocation: shifting the industrial undertaking to an area other than an urban area.
- Eligible expenditure: buying new plant or machinery for the relocated undertaking; acquiring land or a building or constructing a building for its business; shifting original assets and transferring the establishment; or spending on another purpose prescribed under a Central Government scheme.
- Time limit: the eligible expenditure must be incurred within one year before or three years after the date of transfer of the original asset.
- Urban area: for this section, an area within municipal corporation or municipality limits declared by the Central Government for this purpose, considering population, industrial concentration, planning needs and other factors. Municipal status alone does not conclusively establish the required declaration.
How the exemption is calculated
Relief generally equals the lower of the capital gain and eligible qualifying expenditure. If qualifying expenditure is lower than the gain, the balance is taxable. If it equals or exceeds the gain, the gain is not charged under the relevant capital-gains provision, subject to the statutory conditions.
Treatment when the new asset is transferred within three years
Section 54G(1) contains special cost-adjustment rules for the qualifying new asset when it is transferred within three years of purchase, acquisition, construction or transfer. Where the original gain exceeded qualifying cost, the new asset's cost may be treated as nil for the prescribed capital-gains computation; where the qualifying cost met or exceeded the gain, its cost is reduced by the amount of the exempt gain. This is distinct from a simple automatic clawback and requires an asset-specific computation.
Capital Gains Accounts Scheme and unutilised amounts
Under Section 54G(2), qualifying capital gains not already appropriated towards eligible expenditure in the one-year pre-transfer period, or not used before filing the return, had to be deposited in the prescribed account before furnishing the return and no later than the applicable due date under Section 139(1). Amounts properly utilised and deposited are taken into account under the provision.
If the deposited amount remains wholly or partly unused when the three-year period expires, the unutilised amount becomes chargeable under the capital-gains rules for the relevant year, and withdrawal is governed by the applicable scheme. Check the relevant tax year, statutory text and scheme before acting.
Section 54G compared with Section 54GA
Section 54GA addresses qualifying relocation of industrial undertakings to a Special Economic Zone. Section 54G addresses qualifying relocation from an urban area to an area other than an urban area. The destination and statutory conditions must be assessed separately.
Records to retain
Maintain documentation for the original asset and its business use, the applicable urban-area notification, relocation decision, sale deeds, capital-gains computation, invoices for new machinery and land or buildings, transport and establishment costs, proof of payment, dates of purchase or construction, and any Capital Gains Accounts Scheme deposit and utilisation.
Official law and references
Check the Income Tax Department's official legal resources, the Income Tax e-Filing portal, and India Code for the Income-tax Act, 1961, Income-tax Act, 2025, applicable notifications and amendments. These official portals are provided as reliable starting points; the applicable legislation and year-specific notifications control.
Original statutory extract and amendment notes
The following text is retained from the supplied webpage for historical reference. It may not reflect all later amendments or the operative law for a particular tax year.
Read the original Section 54G text and legislative notes
1(1) Subject to the provisions of sub-section (2), where the capital gain arises from the transfer of a capital asset, being machinery or plant or building or land or any rights in building or land used for the purposes of the business of an industrial undertaking situate in an urban area, effected in the course of, or in consequence of, the shifting of such industrial undertaking (hereafter in this section referred to as the original asset) to any area (other than an urban area) and the assessee has within a period of one year before or three years after the date on which the transfer took place,-
(a) purchased new machinery or plant for the purposes of business of the industrial undertaking in the area to which the said undertaking is shifted ;
(b) acquired building or land or constructed building for the purposes of his business in the said area;
(c) shifted the original asset and transferred the establishment of such undertaking to such area; and
(d) incurred expenses on such other purpose as may be specified in a scheme framed by the Central Government for the purposes of this section, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,-
(i) if the amount of the capital gain is greater than the cost and expenses incurred in relation to all or any of the purposes mentioned in clauses (a) to (d) (such cost and expenses being hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its being purchased, acquired, constructed or transferred, as the case may be, the cost shall be nil ; or
(ii) if the amount of the capital gain is equal to, or less than, the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its being purchased, acquired, constructed or transferred, as the case may be, the cost shall be reduced by the amount of the capital gain.
Explanation.-In this sub-section, "urban area" means any such area within the limits of a municipal corporation or municipality as the Central Government may, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, by general or special order, declare to be an urban area for the purposes of this sub-section.
(2) The amount of capital gain which is not appropriated by the assessee towards the cost and expenses incurred in relation to all or any of the purposes mentioned in clauses (a) to (d) of sub-section (1) within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for all or any of the purposes aforesaid before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for all or any of the purposes aforesaid together with the amount, so deposited shall be deemed to be the cost of the new asset:
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for all or any of the purposes mentioned in clauses (a) to (d) of sub-section (1) within the period specified in that sub-section, then,-
(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and
(ii) theassessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.
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1. Ins. by Act 11 of 1987, s. 24 (w.e.f. 1-4-1988).
2. The Explanation omitted by Act 18 of 1992, s. 32 (w.e.f. 1-4-1993).