Section 54D Capital Gains Exemption: Compulsory Acquisition, 3-Year Rule & Section 54H
Direct answer: when does Section 54D apply?
Section 54D can exempt capital gains arising from the compulsory acquisition of land, a building, or rights in land/building that formed part of an industrial undertaking. The key conditions are that the original asset was used for the undertaking’s business during the two years immediately before transfer, and that the assessee reinvests the capital gain in qualifying land/building for shifting, re-establishing, or setting up an industrial undertaking within the statutory period.
For FY 2025-26 / AY 2026-27, this remains an Income-tax Act, 1961 provision. The Income Tax Department has clarified that income earned in FY 2025-26 and the corresponding AY 2026-27 continue under the 1961 Act even though the Income Tax Act, 2025 came into force from 1 April 2026.
1. What property qualifies under Section 54D?
The exemption is narrowly targeted. The original capital asset must be land, a building, or a right in land or building forming part of an industrial undertaking belonging to the assessee. The transfer must take place by way of compulsory acquisition under law.
The asset must be linked to an industrial undertaking; ordinary investment property does not qualify merely because it was compulsorily acquired.
The asset must have been used by the assessee for the business of that industrial undertaking during the two years immediately preceding the transfer.
The provision can apply to land, buildings, and rights in land or buildings; it is not limited to factory land alone.
The reinvestment must serve the purpose of shifting or re-establishing the undertaking, or setting up another industrial undertaking.
2. What can the capital gain be reinvested in?
Section 54D permits reinvestment in another land or building, a right in land or building, or construction of another building. The replacement asset must be for shifting or re-establishing the industrial undertaking, or for setting up another industrial undertaking.
The exemption is therefore not a general rollover for any real-estate purchase. Documentation should establish the commercial connection between the new property and the industrial undertaking—for example, board approvals, project reports, purchase agreements, construction contracts, factory registrations, utility applications and evidence of intended business use.
3. How much exemption is available?
The practical rule is the lower of the capital gain and the qualifying cost of the new asset. If the qualifying reinvestment is at least equal to the capital gain, the capital gain can be fully sheltered under Section 54D. If the reinvestment is lower, the balance remains chargeable.
Worked example
Assume an industrial company has a taxable capital gain of ₹1.80 crore when part of its factory land is compulsorily acquired. It spends ₹1.25 crore on qualifying land and construction for re-establishing the industrial facility. Subject to the statutory conditions, ₹1.25 crore can be sheltered and the remaining ₹55 lakh remains taxable. If qualifying reinvestment were ₹1.80 crore or more, the Section 54D exemption could cover the full ₹1.80 crore gain.
4. Three-year reinvestment period—and why Section 54H matters
Section 54D itself refers to a three-year period after the relevant date for purchase or construction. Compulsory-acquisition cases, however, often involve a gap between the legal transfer and actual receipt of compensation.
Section 54H is crucial here. Where compensation for compulsory acquisition is not received on the date of transfer, the period for acquiring the new asset—and the related period for depositing or investing the capital gain—is reckoned from the date the compensation is received. This rule can materially change the compliance calendar and should be checked before concluding that the reinvestment period has expired.
5. Capital Gains Accounts Scheme: what if reinvestment is not complete before return filing?
If the capital gain has not been fully utilised for the qualifying purchase or construction before filing the return, Section 54D(2) provides a deposit mechanism through the notified Capital Gains Accounts Scheme. The deposit must be made within the statutory return-filing timeline prescribed by the provision.
This remains a live compliance point. CBDT notified the Capital Gains Accounts (Second Amendment) Scheme, 2025 on 19 November 2025, and the notification expressly covers deposits connected with Section 54D among other capital-gains exemption provisions.
6. What happens if the new asset is transferred within three years?
Section 54D contains a clawback mechanism through the cost of the new asset if it is transferred within three years of its purchase or construction. Where the original capital gain exceeded the new-asset cost, the new asset’s cost may effectively be taken as nil for the specified computation. Where the original capital gain was equal to or lower than the new-asset cost, that cost is reduced by the exempted capital gain.
The practical point is that a Section 54D claim should not be planned in isolation from the business’s likely holding period for the replacement property.
7. Section 54D vs Section 54G: do not confuse the two
Both provisions can arise in industrial-relocation planning, but the triggers are different. Section 54D is built around compulsory acquisition of qualifying industrial land/building. Section 54G deals with shifting an industrial undertaking from an urban area to a non-urban area and covers a wider set of assets and relocation expenditure.
For the broader comparison, see Section 54B, 54D & 54G: Lesser-Known Capital Gains Exemptions. For a dedicated industrial-relocation analysis, see Section 54G Capital Gains Exemption.
8. Practical Section 54D checklist
Confirm that the transfer is legally a compulsory acquisition, not an ordinary negotiated sale.
Identify the exact land/building/right that formed part of the industrial undertaking.
Keep evidence that the original asset was used for the undertaking’s business during the two years immediately preceding transfer.
Compute the capital gain and separately track the qualifying reinvestment amount.
Document the purpose of the replacement land/building as shifting, re-establishing, or setting up an industrial undertaking.
Check the actual compensation-receipt date and apply Section 54H where compensation was not received on the transfer date.
If reinvestment is incomplete by the relevant return-filing deadline, examine the Capital Gains Accounts Scheme deposit requirement.
Track construction and purchase payments asset-wise; avoid mixing qualifying industrial property expenditure with unrelated real-estate expenditure.
Preserve acquisition award, compensation statement, title documents, payment trails, board/partner approvals and project evidence.
Before disposing of the replacement asset within three years, model the Section 54D cost-base consequences.
Frequently asked questions
Is Section 54D available only to individuals?
No. The statutory wording is not restricted to individuals or HUFs. The central question is whether the qualifying industrial undertaking, original asset, compulsory acquisition and reinvestment conditions are satisfied.
Does any compulsory acquisition of land qualify?
No. The land, building or right must form part of an industrial undertaking and satisfy the required business-use condition for the two years immediately before transfer.
Does Section 54D require purchase of a factory building only?
No. The provision covers qualifying land, buildings and rights in land/buildings, including construction of another building, provided the statutory industrial-purpose condition is met.
From which date is the three-year period counted if compensation is received later?
Where the compensation is not received on the date of transfer, Section 54H provides that the relevant period for acquiring the new asset or depositing/investing the gain is reckoned from the date of receipt of compensation.
Which Act governs a Section 54D claim for FY 2025-26 / AY 2026-27?
The Income-tax Act, 1961. The Income Tax Department has clarified that FY 2025-26 / AY 2026-27 continues under the old Act; the Income Tax Act, 2025 applies to income from Tax Year 2026-27 onward, subject to transition provisions.
Primary sources
Professional takeaway
Section 54D can be valuable where a factory or other industrial property is compulsorily acquired, but the exemption depends on a chain of factual evidence: industrial use, the legal nature of the acquisition, timing of compensation, qualifying reinvestment and correct handling of unutilised amounts. The tax result should be modelled before replacement-property commitments are finalised, not reconstructed only when the return is filed.
PGT & Associates assists businesses and promoters with capital-gains computation, compulsory-acquisition tax analysis, reinvestment planning, CGAS documentation and return reporting. For case-specific assistance, contact PGT & Associates.
Disclaimer
This article is for general professional information and does not constitute legal or tax advice. Section 54D claims are fact-specific, and the applicable law, compensation chronology, asset character and reinvestment documentation should be reviewed for the relevant assessment year before taking a tax position.
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