Finance Minister Nirmala Sitharaman, in the Union Budget 2021-22, extended the income tax exemptions allowed on capital gains arising from sale of residential property if proceeds are invested in eligible startups. 

“In order to incentivise startups in the country, I propose to extend the eligibility for claiming tax holiday for startups by one more year to March 31, 2022…In order to incentivise funding for the startups, I propose to extend the capital gains exemption for investment in startups by one more year to March 31, 2022,” Sitharaman said. 

Under the provisions given under Section 54GB, tax relaxation is provided to individuals or Hindu United Family (HUF) on capital gains arising out of the sale of residential property if the proceeds are invested in buying equity shares of a startup. 

Originally, the exemption under Section 54GB was allowed if gains from sale of residential property were invested in small or medium companies as defined under the Micro, Small and Medium Enterprises Act, 2006. But this was later amended to include exemption on capital gains invested in eligible startups. 

The tax assessee claiming this exemption is required to utilise the net consideration before the due date of furnishing the income tax return. 

How much exemption is allowed?

If the amount of net consideration is equal to or less than the cost of the new asset then entire capital gains would be exempt and if the amount of net consideration is greater than the cost of the new asset then the proportionate capital gain would be calculated based on investment in new asset, capital gain and net consideration.

Conditions for exemption

The equity shares acquired cannot be transferred for a period of five years from the date of acquisition and the exemption would be withdrawn if shares are transferred. The startup shall also be required to use the amount of investment to purchase assets within a period of one year from the date of investment. However, if the amount is not re-invested then the assessee is required to deposit the amount into ’Capital Gan Deposit Account’  

The extension coupled with a similar tax holiday extension given to eligible startups under the Union Budget 2021-22 should give incentives to promoters and investors in startups for a period of one year.