Tax Exemption Under Section 54GA for NRIs

Section 54GA of the Income Tax Act 1961 allows taxpayers to claim tax exemption from the capital gains arising from the sale of a capital asset of an industrial undertaking while shifting from an urban area to a special economic zone (SEZ).

Considering this, the tax exemption under Section 54GA for NRIs is also available. If you own a workshop, manufacturing unit, or industrial setup in India and are planning to relocate it to an SEZ. It heavily depends on how your business in India is structured.

Want to know more about section 54GA for NRIs and how you can claim it? Read on the blog and get your answers.

What is Section 54GA of the Income Tax Act?

Section 54GA of the Income Tax Act, 1961, provides a tax exemption on capital gains (long-term and short-term) when businesses shift an industrial undertaking from an urban area to an SEZ. Considering this, if you have generated capital gains from the transfer or sale of capital assets of an industrial undertaking which is located in an urban area, then you can claim tax exemption on capital gains. However, the tax exemption is only available if the capital gain arises on account of the shifting of an industrial undertaking from an urban area to a Special Economic Zone (SEZ).

This tax exemption is introduced to encourage businesses to move out of the crowded city to the SEZ, which comes with its own export incentives and infrastructure. This section is closely associated with section 54G, which offers similar tax relief for shifting from an urban area to a rural area.

This was all about section 54GA of the Income Tax Act 1961. Moving ahead, let's know whether NRIs also claim tax exemption under this section.

Can NRIs Claim Section 54GA Exemption?

Yes, NRIs can claim capital gains tax exemption under section 54GA. Considering this, unlike some capital gains tax exemptions that are only available to individuals and HUFs, this section is available to all categories. It includes HUFs, individuals, companies, NRIs, firms, and partnerships. There is no residency and citizenship bar to the section.

In simple terms, NRIs who run an industrial undertaking in India as a partner in a firm, sole proprietor, or stake through a company can use section 54GA when they relocate their business to an SEZ.

Under this section, what matters is who owns the asset before transfer or sale. Considering this, if you run the business as a sole proprietor, you can claim tax exemption under this section in your ITR. However, if you operate a business through a company, the company is liable to claim tax exemption.

So, from the above information, it is clear that tax exemptions are also available under section 54GA for NRIs if they relocate their business to an SEZ. Now, moving further, let's know the eligibility conditions for this section.

Eligibility Conditions for Section 54GA

The following are the conditions that need to be satisfied to claim tax exemption under section 54GA:

• Applicability: Under section 54GA, all the categories of persons, such as individuals, NRIs, HUFs, partnerships, and more, can avail tax exemption.
• Capital Gain Type Eligible for Exemption: Both short-term and long-term capital gains are eligible for tax exemption under this section.
• Nature of Capital Gain: This section provides a tax exemption on capital gain generated from the sale or transfer of a capital asset by an industrial undertaking situated in an urban area. The capital asset includes:
• Plant or machinery
• Land or building
• Any rights in building or land used for business purposes
• Nature of Investment to be Made: The Assessee needs to reinvest the capital amount in shifting the industrial undertaking from the urban area to an industrial undertaking located in any SEZ. The capital gains reinvestment timeline is within a period of one year before or three years from the transfer date. Additionally, the Section 54GA reinvestment requirements are as follows:
• Purchasing plant or machinery in an industrial undertaking shifted to a special economic zone.
• Acquiring land or constructing/purchasing a building for the business of an industrial undertaking shifted to an SEZ.
• Any expenditure incurred for the shifting of an industrial undertaking in SEZ.
• Any other expenditure as stated by the central government of India.

These are the Section 54GA eligibility conditions to claim tax exemption from capital gains. Moving forward, let's know the amount of tax exemption available under this section.

Amount of Tax Exemption Under 54GA

If all the conditions are satisfied by the assessee, the exemption shall be available as follows:

• The amount invested in land/ building/ plant/ machinery for shifting the industrial undertaking from an urban area to an SEZ. Or
• The capital gain amount

Among both, whichever is lower of that amount, a tax exemption is provided under section 54GA. Confused? Let's better understand with an example.

Lock-in Period and the Consequences of Transferring the New Capital Asset

You cannot transfer the newly acquired capital assets within a period of three years from the investment date. However, if you transfer the newly acquired capital assets before the period of three years, then the allowed tax exemption under section 54GA will be withdrawn.

In case of withdrawal and transfer of exemption during the calculation of the capital gain of the newly transferred asset, the acquisition cost of the newly transferred asset would be reduced by the amount claimed under section 54GA.

So, do not transfer the newly acquired capital asset within three years of its acquisition, or if you do so, be ready to face the consequences of transferring the new asset. Moving further, let's know about the capital gains account scheme under section 54GA.

Capital Gains Accounts Scheme (CGAS)

If the amount is not entirely invested in acquiring new assets by the last date of the return under section 139, then you need to deposit the balance amount into the Capital Gain Deposit Account Scheme.

You need to use the deposited amount within three years. However, if you do not use the amount within the given period, then the unutilized amount would be taxed in the year in which the time period ends.

This was all about the capital gain deposit account scheme. Moving forward, let's know how to claim tax exemption under section 54GA.

How to Claim Tax Exemption Under Section 54GA?

To claim exemption u/s 54GA, you need to do the following things:

Documentation Requirements

To claim exemption u/s 54GA, you need to submit the required documents and proofs to the Income Tax Department of India. These include:

• Proof of your original urban industrial undertaking (GST records, registration, or business address proof)
• Transfer documents or the sale deed of the original asset
• Agreements or purchase invoices for new machinery, land, plant, or building in the SEZ
• Under the SEZ Act, 2005, proof of the SEZ location qualifies as a Special Economic Zone
• If applicable, the CGAS deposit record
• If you are claiming relocation-related expenses of the reinvestment, a clear record of those expenses is also needed.

Reporting in the Income Tax Return

After submitting the requested documents to the income tax department, you also need to report the received capital gain in your ITR. Considering this:

• Fill out the ITR-3 form if you are an individual or HUF, or if you are a company, fill out the ITR-6 form, or if you are a firm/partneship, fill out the ITR-5 form. This is because the capital gains arise from the transfer of business assets and investments into the SEZ.
• Report the received capital gain from the asset transfer under Schedule Capital Gains in your ITR.
• Claim the tax exemptions under section 54GA in the relevant exemption field.

Furthermore, while reporting under section 54GA in ITR, keep the above-mentioned document by your side. Now, moving ahead, let's know the common mistakes to avoid while claiming a tax exemption under this section.

Common Mistakes to Avoid While Claiming Section 54GA

Common mistakes to avoid while claiming tax exemption under section 54GA for NRIs include:

• Stop assuming the tax exemption applies to any business that is relocating. The section only applies to businesses that move from an urban area into an SEZ.
• Getting confused between individual and company ownership. If the business operates through a company, then the company is liable to claim exemption under section 54GA, not the individual.
• Not considering the reinvestment window is the most common mistake made by individuals. Considering this, reinvest the capital gain amount 1 year before or within three years from the date of transfer.
• Not depositing the unutilized capital gains into the Capital Gains Accounts Scheme (CGAS) before the due date prescribed under Section 139. This is a safeguard that many taxpayers forget to use before the due date.
• Selling the new SEZ assets early, i.e., before completion of three years. It reverses the tax exemption and creates an unexpected tax obligation.

These are some of the common mistakes you should avoid when claiming tax exemption under section 54GA of the Income Tax Act, 1961.

Final Thoughts

Lastly, section 54GA of the Income Tax Act, 1961, provides a beneficial tax exemption for businesses moving from urban areas to SEZs, making the transfer financially viable. This tax benefit is also available for NRIs. By planning the transfer of assets and reinvestment carefully, tax exemption under section 54GA for NRIs can help in maximizing their tax savings while leveraging the benefits of working in an SEZ.

Furthermore, if you are considering relocating your industrial undertaking and looking for assistance in this, connect with Savetaxs. We have a team of financial experts by our side who can help you ensure compliance and get the tax benefits.