Section 54G Capital Gains Exemption: Industrial Undertaking Shift, Time Limits & Conditions
Direct answer: Section 54G can exempt capital gains arising when an industrial undertaking shifts from a notified urban area to a non-urban area and the taxpayer reinvests the gain in qualifying machinery, plant, land, building and shifting-related expenditure within the statutory window. For FY 2025-26 / AY 2026-27, the provision continues to be governed by the Income-tax Act, 1961.
What does Section 54G cover?
Section 54G is a business-relocation capital-gains provision. It applies where a capital asset—machinery, plant, building, land, or rights in building or land—was used for the business of an industrial undertaking situated in an urban area and is transferred in the course of, or because of, shifting that undertaking to an area other than an urban area.
This makes Section 54G materially different from the better-known residential-house exemptions. The relief is linked to a genuine industrial relocation and to specified reinvestment connected with that relocation.
The reinvestment window: 1 year before to 3 years after transfer
The statute gives a broad implementation window. Qualifying expenditure may be incurred within one year before or three years after the date of transfer.
Purchase new machinery or plant for the shifted industrial undertaking.
Acquire land or a building, or construct a building, for the business at the new location.
Shift the original assets and transfer the establishment of the undertaking to the new area.
Incur other qualifying relocation expenditure covered by a notified scheme, where applicable.
For transaction planning, the important point is to document the connection between the asset transfer, the relocation decision and each item of reinvestment. A purchase made within the time window is not enough by itself if it cannot be tied to the qualifying shift.
How much exemption can be claimed?
The exemption broadly follows the amount of qualifying reinvestment. If the qualifying cost and expenditure are lower than the capital gain, the shortfall remains taxable. If qualifying reinvestment equals or exceeds the capital gain, the capital gain is not charged at that stage.
Example: Assume an industrial undertaking records a capital gain of ₹80 lakh on qualifying assets while shifting from a notified urban area. If ₹62 lakh is spent on qualifying new plant, land/building and relocation expenditure, the practical exemption is limited to ₹62 lakh and the balance ₹18 lakh remains taxable, subject to the detailed facts and computation rules.
Capital Gains Accounts Scheme: do not miss the return-due-date test
A frequent practical problem is that the three-year reinvestment period may still be open when the income-tax return becomes due. Section 54G addresses this through the Capital Gains Accounts Scheme mechanism.
If the capital gain has not been fully utilised for the qualifying purposes before furnishing the return, the unutilised amount must be deposited in the prescribed account before furnishing the return and, in any event, no later than the due date applicable under section 139(1). The amount already used plus the amount properly deposited is then taken into account for the exemption.
If the deposited amount is not ultimately utilised within the statutory three-year period, the unutilised balance becomes chargeable as capital gain in the year in which that period expires.
Three-year lock-in: early transfer can change the tax result
Section 54G also contains a cost-adjustment rule where a new asset is transferred within three years of its purchase, acquisition, construction or transfer. The earlier exemption therefore has to be considered before computing the later capital gain. Businesses should not treat the reinvested asset as tax-neutral immediately after the relocation.
AY 2026-27 transition: which Income-tax Act applies?
This point matters in 2026 because India moved to the Income Tax Act, 2025 from 1 April 2026. The Income Tax Department’s transition guidance confirms that income earned during FY 2025-26 remains governed by the Income-tax Act, 1961 and is assessed in AY 2026-27. Income earned from 1 April 2026 onward falls under the new tax-year framework.
Accordingly, a transfer falling in FY 2025-26 should be analysed under Section 54G of the 1961 Act. For a transfer occurring from 1 April 2026 onward, advisers should use the corresponding provision of the 2025 Act and the new Rules rather than mechanically relying on the old section number.
Section 54G due-diligence checklist
Confirm that the transferred asset was actually used for the business of an industrial undertaking.
Verify that the original undertaking was situated in an urban area declared for the purpose of the provision.
Document that the transfer occurred in the course of or as a consequence of shifting the undertaking.
Verify that the destination qualifies as an area other than an urban area for Section 54G.
Prepare an asset-by-asset capital-gain computation before deciding the reinvestment amount.
Maintain invoices, purchase agreements, construction records, freight/shifting bills and board or management approvals establishing the relocation trail.
Track the one-year-before / three-years-after reinvestment window in a transaction calendar.
Where funds remain unutilised before the return is filed, test the Capital Gains Accounts Scheme deposit deadline separately from the three-year reinvestment deadline.
Flag any proposed disposal of the new assets within three years for cost-basis review before execution.
Common mistakes that can weaken a Section 54G claim
Treating every business relocation as eligible without verifying the statutory urban-area condition.
Claiming expenditure that is commercially connected with expansion but not demonstrably connected with the qualifying shift.
Waiting for the three-year period and overlooking the earlier Section 139(1) deposit deadline for unutilised gains.
Failing to preserve evidence that the old assets were used in the industrial undertaking.
Ignoring the tax consequences of transferring the new asset within three years.
Applying Section 54G to a post-1 April 2026 transaction without checking the corresponding provision under the Income Tax Act, 2025.
Related PGT & Associates guide
For a comparison with Sections 54B and 54D, read our broader guide: Section 54B, 54D & 54G — Lesser-Known Capital Gains Exemptions.
Frequently asked questions
Is Section 54G available for any factory relocation?
No. The statutory conditions focus on an industrial undertaking situated in a qualifying urban area that shifts to an area other than an urban area. The asset use, location and causal link with the shift should all be verified.
Can reinvestment happen before the old asset is sold?
Yes. The statutory window can include qualifying expenditure incurred up to one year before the transfer, as well as expenditure within three years after it.
What if the capital gain is not fully spent before the ITR due date?
The unutilised amount may need to be deposited under the prescribed Capital Gains Accounts Scheme mechanism no later than the applicable Section 139(1) due date, even though the three-year reinvestment period has not yet expired.
Does Section 54G apply to FY 2026-27 transfers?
For income from 1 April 2026 onward, the Income Tax Act, 2025 applies. The old Section 54G label should not be used without mapping the transaction to the corresponding new-law provision.
Is Section 54GA the same as Section 54G?
No. Section 54GA is the separate 1961 Act provision dealing with qualifying shifts of industrial undertakings to a Special Economic Zone. Section 54G addresses a qualifying shift from an urban area to an area other than an urban area.
Primary references
How PGT & Associates can help
For an industrial relocation, the exemption claim should be designed before the asset sale and reinvestment cycle is completed—not reconstructed at return-filing stage. PGT & Associates can assist with eligibility review, capital-gain computation, reinvestment mapping, deposit-timeline controls and documentation for assessment support.
Disclaimer: This article is for general professional information and does not constitute legal or tax advice. Section 54G eligibility is fact-specific and should be reviewed against the law, notifications and facts applicable to the relevant transfer date.
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