Income Tax 2025

Appearance

Capital gains on transfer of certain capital assets not to be charged in case of investment in residential house. ​

88(1) ​

Irrespective of anything contained in section 87 if the assessee has––

  • (a) capital gains arising 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 business of an industrial undertaking situated in an urban area, effected in the course of or in consequence of shifting of such industrial undertaking (original asset) to any Special Economic Zone in any area; and
  • (b) has within one year before or three years after the date of such transfer,— (i) purchased machinery or plant for the business of the industrial undertaking in such Special Economic Zone; (ii) acquired building or land or constructed building for his business in such Special Economic Zone; (iii) shifted the original asset and transferred the establishment to such Special Economic Zone; and (iv) incurred expenses on such other purposes specified by a scheme notified by the Central Government in this behalf, then, instead of capital gain being charged to income-tax as income of the tax year in which the transfer took place, it shall be dealt with as follows:— (A) if the cost and expenses incurred in on all or any of the purposes mentioned in clauses (i) to (iv) (new asset)–– (I) is less than the capital gains, the difference shall be charged under section 67 as the income of the tax year; or (II) is equal to or more than the capital gains, no capital gain shall be charged under section 67; (B) for computing any capital gain arising from transfer of the new asset within three years of its being purchased, acquired, constructed or transferred, the cost shall be nil in case of clause (a), or shall be reduced by the amount of the capital gain in case of clause (b).

88(2) ​

If the capital gain is not utilised by the assessee for the new asset within one year before the transfer of the original asset, or before filing the return of income under section 263, then,––

  • (a) the unutilised amount shall be deposited not later than the due date for filing the return of income under sub-section (1) of the said section in a specified bank or institution and utilised as per the scheme notified by the Central Government;
  • (b) such deposit shall be made not later than the due date applicable in the case of the assessee for filing the return of income under the said sub-section; and
  • (c) the proof of deposit shall be submitted along with the return on or before the due date for filing the return.

88(3) ​

For the purposes of sub-section (1), the amount already utilised for purchasing or constructing the new asset together with the deposited amount under sub-section (2) shall be deemed to be the cost of the new asset.

88(4) ​

If the amount deposited under sub-section (2) is not wholly or partly utilised for the new asset within the period specified in sub-section (1), then,—

  • (a) the unutilised amount shall be charged under section 67 as the income of the tax year in which the period of three years from the date of the transfer of the original asset expires; and
  • (b) the assessee shall be entitled to withdraw the unused amount according to the said scheme.

88(5) ​

In this section “urban area” shall have the meaning assigned to it in section 87

Explanation

Section Summary: ​

This section provides a tax exemption on capital gains arising from the transfer of certain capital assets (like machinery, plant, building, or land) used for an industrial undertaking in an urban area, provided the gains are reinvested in a Special Economic Zone (SEZ). The exemption applies if the industrial undertaking is shifted to an SEZ, and the taxpayer invests in new assets (machinery, plant, building, or land) within a specified timeframe. The goal is to encourage industrial relocation to SEZs by offering tax relief on capital gains.

Key Changes: ​

  1. Expanded Scope of Exemption: Previously, capital gains exemptions were limited to specific reinvestments. This section now includes reinvestments in SEZs, aligning with the government's push to promote industrial growth in these zones.
  2. Timeframe for Reinvestment: The taxpayer must reinvest the capital gains within one year before or three years after the transfer of the original asset.
  3. Deposit Mechanism for Unutilised Gains: If the capital gains are not immediately reinvested, they must be deposited in a specified bank or institution as per a government-notified scheme.
  4. Penalty for Non-Utilisation: If the deposited amount is not utilised within three years, the unutilised portion will be taxed as income in the year the three-year period expires.

Practical Implications: ​

  1. For Industrial Undertakings: Businesses relocating to SEZs can benefit from significant tax savings by reinvesting capital gains into new assets. This incentivises industrial growth in SEZs.
  2. Compliance Burden: Taxpayers must carefully track reinvestment timelines and ensure proper documentation to claim the exemption.
  3. Risk of Taxation: Failure to reinvest or deposit the capital gains within the stipulated timeframe will result in the gains being taxed as income.

Critical Concepts: ​

  1. Original Asset: The machinery, plant, building, or land used for the industrial undertaking in an urban area that is transferred.
  2. New Asset: The machinery, plant, building, or land purchased, acquired, or constructed in the SEZ within the specified timeframe.
  3. Urban Area: Defined as per Section 87, typically referring to areas with higher population density and industrial activity.
  4. Special Economic Zone (SEZ): A designated area with economic laws that are more business-friendly than the country's typical economic laws, aimed at attracting foreign investment and boosting exports.

Compliance Steps: ​

  1. Track Reinvestment Timeline: Ensure reinvestment in new assets occurs within one year before or three years after the transfer of the original asset.
  2. Deposit Unutilised Gains: If capital gains are not immediately reinvested, deposit the amount in a specified bank or institution before filing the income tax return.
  3. Submit Proof of Deposit: Include proof of deposit along with the income tax return.
  4. Monitor Utilisation Period: Ensure the deposited amount is utilised within three years to avoid taxation on unutilised gains.

Examples: ​

Scenario 1: A manufacturing company in Mumbai (an urban area) sells its factory building for ₹5 crore, resulting in a capital gain of ₹2 crore. The company relocates its operations to an SEZ in Gujarat. Within two years, it purchases new machinery worth ₹2 crore for its SEZ unit. The entire capital gain is exempt from tax.

Scenario 2: The same company sells its factory building for ₹5 crore but only reinvests ₹1.5 crore in new machinery within three years. The remaining ₹50 lakh is deposited in a specified bank. If the ₹50 lakh is not utilised within three years, it will be taxed as income in the year the three-year period ends.

This section provides a clear pathway for businesses to reinvest capital gains tax-efficiently while supporting industrial growth in SEZs.