Section 54GB of Income Tax Act: A Complete Guide to Tax Exemption for Investment in Eligible SMEs

March 3, 2023

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Section 54GB of the Income Tax Act: Understanding its Provisions and Benefits

Section 54GB of the Income Tax Act was introduced in 2016 to provide tax relief to individuals who have invested in small and medium enterprises (SMEs) by selling their residential property. This section allows individuals to claim a deduction on the capital gains made from the sale of a residential property, provided the proceeds are invested in the equity shares of an eligible SME. Let’s take a closer look at the provisions of Section 54GB and its benefits.

Eligibility Criteria for Section 54GB

To avail of the benefits under Section 54GB, an individual must fulfill the following conditions:

The individual must be a resident of India.
The individual must have earned long-term capital gains from the sale of a residential property.
The individual must invest the proceeds from the sale of the residential property in equity shares of an eligible SME.
The SME must use the funds raised from the sale of equity shares to expand its business.

Benefits of Section 54GB

Section 54GB offers several benefits to individuals who invest in eligible SMEs. Here are some of the key benefits:

Tax exemption: The capital gains made from the sale of a residential property can be exempted from tax if the proceeds are invested in eligible SMEs. This exemption is available under Section 54GB for investments made between April 1, 2016, and March 31, 2021.
Holding period: The equity shares of the SMEs must be held for a minimum period of five years to be eligible for tax exemption under Section 54GB.
Investment limit: The maximum amount that can be invested in eligible SMEs is Rs. 50 lakh. Any investment made above this limit will not be eligible for tax exemption under Section 54GB.
SME eligibility: To be eligible for investment under Section 54GB, an SME must be a company incorporated in India, with a turnover of up to Rs. 25 crore in the year of investment.
Expansion of SMEs: Section 54GB encourages the expansion of SMEs by providing them with funds raised from the sale of equity shares. This, in turn, helps to create more job opportunities and contributes to the growth of the economy.

How to Claim Tax Exemption under Section 54GB

To claim tax exemption under Section 54GB, an individual needs to follow the below-mentioned steps:

Invest in eligible SMEs: The first step is to invest the proceeds from the sale of the residential property in the equity shares of an eligible SME. The investment must be made within six months from the date of sale of the residential property.
Obtain certificate from the SME: The SME must issue a certificate to the individual within 15 days of receiving the funds. The certificate must state that the funds have been used to expand the business of the SME.
Calculate capital gains: The individual must calculate the capital gains made from the sale of the residential property. The capital gains are calculated as the difference between the sale price and the cost of acquisition of the property.
Claim exemption: The individual can claim exemption on the capital gains by deducting the amount invested in eligible SMEs from the capital gains.
File income tax return: The individual must file an income tax return and provide the details of the investment made in eligible SMEs to claim tax exemption under Section 54GB.

Points to Remember while Investing in SMEs under Section 54GB

Here are some points that an individual must keep in mind while investing in SMEs under Section 54GB:

The investment must be made only in equity shares of eligible SMEs.
The SME must utilize the funds raised from the sale of equity shares for the purpose of expanding its business.
The investment in eligible SMEs must be made within six months from the date of sale of the residential property.
The equity shares of the SMEs must be held for a minimum period of five years to be eligible for tax exemption under Section 54GB.
The maximum amount that can be invested in eligible SMEs is Rs. 50 lakh.

Impact of Section 54GB on SMEs

Section 54GB of the Income Tax Act has been introduced to promote investment in eligible SMEs by providing tax benefits to individuals who invest in them. This has a significant impact on the growth of SMEs in India. Here are some of the ways in which Section 54GB has impacted SMEs:

Boost in Funding: Section 54GB has encouraged investment in eligible SMEs, thereby increasing their access to funds. This has helped SMEs to expand their business operations and invest in new technologies, thereby increasing their competitiveness.
Job Creation: With the increased funding, SMEs can invest in new projects and expand their business operations. This creates more job opportunities, thereby contributing to the overall growth of the economy.
Encourages Entrepreneurship: Section 54GB encourages entrepreneurship by providing tax benefits to individuals who invest in eligible SMEs. This has led to an increase in the number of start-ups in India, thereby contributing to the growth of the economy.
Better Access to Markets: SMEs that have received funding under Section 54GB can access new markets and expand their customer base. This helps SMEs to diversify their business operations and reduce their dependence on a single market or product.
Improved Technology Adoption: With the increased funding, SMEs can invest in new technologies and equipment, which helps to improve their production processes and increase their efficiency.

Conclusion

Section 54GB of the Income Tax Act provides a significant tax relief to individuals who invest in eligible SMEs by selling their residential property. The benefits of Section 54GB include tax exemption, holding period, investment limit, SME eligibility, and the expansion of SMEs. By providing tax relief to investors and encouraging the growth of SMEs, Section 54GB contributes to the overall economic development of the country. It is important for individuals to understand the provisions of Section 54GB and take advantage of its benefits, if they are eligible.

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Frequently Asked Questions (FAQs)

What is Section 54GB of the Income Tax Act?

Section 54GB of the Income Tax Act provides tax exemption to individuals who invest the proceeds from the sale of a residential property in the equity shares of an eligible SME.

2. What is the eligibility criteria for Section 54GB?
The eligibility criteria for Section 54GB are that the individual must invest in eligible SMEs within six months from the date of sale of the residential property, and the SME must use the funds to expand its business operations.

3. What is the maximum amount that can be invested in eligible SMEs under Section 54GB?
The maximum amount that can be invested in eligible SMEs under Section 54GB is Rs. 50 lakh.

4. Can an individual claim tax exemption under Section 54GB for investment in debt instruments of an SME?
No, an individual can claim tax exemption under Section 54GB only for investment in equity shares of an eligible SME.

5. Is there a minimum holding period for equity shares of an SME under Section 54GB?
Yes, the equity shares of the SMEs must be held for a minimum period of five years to be eligible for tax exemption under Section 54GB.

6. Can an individual invest in multiple eligible SMEs to claim tax exemption under Section 54GB?
Yes, an individual can invest in multiple eligible SMEs to claim tax exemption under Section 54GB.

7. Can a company or a partnership firm claim tax exemption under Section 54GB?
No, tax exemption under Section 54GB can only be claimed by individuals.

8. Can an individual claim tax exemption under Section 54GB if the residential property was inherited?
No, tax exemption under Section 54GB cannot be claimed if the residential property was inherited.

9. Is there a time limit for utilizing the funds invested in eligible SMEs under Section 54GB?
No, there is no time limit for utilizing the funds invested in eligible SMEs under Section 54GB.

10. Can an individual claim tax exemption under Section 54GB for investment in an SME that is not registered in India?
No, tax exemption under Section 54GB can only be claimed for investment in an SME that is registered in India.