Prove the qualifying relocation before counting expenditure
Section 54G of the Income-tax Act, 1961 concerns capital gains on specified business assets transferred in the course of, or because of, shifting an industrial undertaking from an urban area to an area other than an urban area. The original assets may be machinery, plant, building, land or rights in building/land used for the industrial undertaking’s business. It is not the same relief as section 54D compulsory-acquisition relief. A commercially described factory relocation does not establish every statutory condition.
Read the applicable text: Income-tax Act, 1961: section 54G Department transition FAQs CBDT Notification 161/2025: Capital Gains Accounts Scheme amendments CBDT Notification 116/2006 dated 27 April 2006: location-specific urban-area schedule.
Use the section’s urban-area definition
The explanation refers to areas within municipal corporation or municipality limits declared by the Central Government by general or special order for this purpose. A municipal address, population figure or the capital-gains definition of another kind of property is not a substitute for that notification evidence. Obtain the relevant order and boundary evidence for the original location and establish the destination’s status. Notification 116/2006 dated 27 April 2006 is an example of a declaration with a location-specific schedule. It is not a declaration covering every municipal area in India. Match the actual site to the relevant order, its boundaries and any later applicable orders; this guide makes no automatic current-status claim for a particular city. Its examples assume that the statutory location and industrial-business conditions have already been proved.
Map costs to the statutory purposes
Section 54G(1)(a) covers new machinery/plant for the undertaking in the destination area; clause (b) covers acquiring building/land or constructing a building for the business there; clause (c) addresses shifting the original asset and transferring the establishment. Clause (d) concerns other purposes specified in a government scheme; do not use it as an unrestricted miscellaneous-cost category. Maintain invoice-level purpose, location and timing evidence. General working capital, unrelated investments and unsupported spending should not be included merely because incurred during the move.
Apply the investment window and gain comparison
The stated window is one year before or three years after transfer of the original asset. Compare the independently determined gain with eligible cost and expenses under the section. Where gain exceeds that qualifying amount, the difference remains chargeable under section 45; where qualifying cost is at least the gain, the gain is sheltered subject to all conditions. Do not compare gross sale proceeds instead of the gain, or count the same expense in multiple project categories. Asset-specific capital-gain computations, including depreciable-block issues, require their own analysis first.
Maintain the pre-filing utilisation and deposit trail
Section 54G(2) addresses gain not appropriated towards the specified costs in the preceding-year window or not utilised for those purposes before furnishing the section 139 return. The Capital Gains Accounts Scheme, 1988 deposit must precede filing and, in any case, be no later than the applicable section 139(1) due date. A normal bank balance is not automatically the statutory scheme deposit. This deposit scheme under subsection (2) is distinct from a scheme specifying additional eligible spending purposes under subsection (1)(d); opening a CGAS account does not itself expand clause (d). Keep utilisation and deposits separate so a later payment funded from the deposit is not counted twice as additional relief.
Track later use and disposal without mechanically carrying old sections forward
Under subsection (2)’s proviso, an amount not utilised for the qualifying purposes within the prescribed period is charged under section 45 in the year the three-year period from transfer expires, with withdrawal permitted under the scheme. Check the later-period transition rules before reporting the expiry charge. Section 54G(1)(i)/(ii) also contains nil-cost or reduced-cost consequences for a transfer of the new asset within its specified three-year period. Preserve the project and asset history for those reviews. This article addresses FY 2025–26/AY 2026–27 under the 1961 Act; later-period events require the applicable transition and current-law analysis. No universal company return date or specific notified-city claim is asserted here.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Different qualifying cost categories
Assume gain ₹60 lakh, eligible new machinery ₹25 lakh, qualifying premises cost ₹20 lakh and supported shifting expenditure ₹5 lakh. Eligible total is ₹50 lakh, leaving ₹10 lakh in the gain comparison. The location, purpose and other conditions are assumed satisfied.
Illustrative example 2: General spending is not automatically eligible
A move costs ₹40 lakh: ₹30 lakh is established as qualifying under clauses (a)–(c), while ₹10 lakh is unrelated investment. With gain ₹45 lakh, the qualifying comparison leaves ₹15 lakh, not ₹5 lakh. Clause (d) must not be used to absorb the unrelated amount without an applicable scheme basis.
Illustrative example 3: Reinvestment before transfer
Qualifying expenditure of ₹12 lakh occurs in the permitted preceding-year window and ₹18 lakh after transfer within the permitted period. Total eligible cost is ₹30 lakh. Against gain ₹35 lakh, the remaining amount is ₹5 lakh. The pre-transfer payment is not excluded merely because it predates the sale, if the statutory facts are met.
Illustrative example 4: Avoid duplicate shifting invoices
The premises schedule includes a ₹3 lakh invoice also included in shifting costs. Unadjusted category totals are ₹28 lakh and ₹7 lakh, or ₹35 lakh. Removing the duplicate leaves ₹32 lakh. With gain ₹40 lakh, the correct residual comparison is ₹8 lakh, not ₹5 lakh.
Illustrative example 5: Use plus deposit with later spending
Gain is ₹50 lakh. Before filing, ₹20 lakh is validly utilised and ₹30 lakh is validly deposited in the specified scheme on time. The initial control is ₹50 lakh. Later qualifying use of ₹10 lakh from that deposit changes the deposit balance to ₹20 lakh; it does not increase the original control to ₹60 lakh.
Illustrative example 6: Unused deposit at the end of the period
Assume the full ₹18 lakh deposit represented gain sheltered in the initial computation. It funds ₹13 lakh qualifying expenditure within the relevant period. The unused amount is ₹5 lakh. Review the expiry-year charge and withdrawal rule for that ₹5 lakh; do not assume the original deposit permanently protected it. Apply the law and transition provisions governing the later event.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the income period | FY/AY and applicable Act. |
| 2 | Identify the industrial undertaking | Business and original-asset use evidence. |
| 3 | Establish statutory urban status | Government order and original-location boundaries. |
| 4 | Establish the destination | Evidence that the location condition is met. |
| 5 | Link transfer to shifting | Commercial and operational relocation records. |
| 6 | Compute gain independently | Asset/block and consideration working. |
| 7 | Map eligible costs once | Clauses (a)–(d), invoices and purpose. |
| 8 | Verify the timing window | Transfer, appropriation and spending dates. |
| 9 | Control scheme deposits | Pre-filing evidence and applicable statutory due date. |
| 10 | Maintain later-event controls | Utilisation, asset disposals and transition-law review. |
Sixteen practitioner FAQs
1. Is compulsory acquisition required by section 54G?
It addresses qualifying transfers connected with industrial shifting; do not import section 54D’s compulsory-acquisition condition.
2. Can a company be eligible?
The provision is not confined to individuals or HUFs; all conditions still require proof.
3. Is every municipal area automatically qualifying?
No. Establish the Central Government declaration required by the section’s explanation.
4. Can another section’s urban definition be copied?
Do not assume different definitions are interchangeable.
5. Which original assets are identified?
Machinery, plant, building, land and rights in building/land used for the undertaking’s business.
6. Can new machinery qualify?
Clause (a) addresses new machinery/plant for the destination undertaking’s business, subject to the facts.
7. Can shifting expenditure qualify?
Review clause (c) and preserve the actual asset/establishment shifting evidence.
8. Does clause (d) cover all miscellaneous costs?
No. It refers to purposes specified in a government scheme.
9. What is the stated investment window?
One year before or three years after transfer, with the section’s further conditions.
10. Is relief based on gross proceeds?
The computation compares the capital gain with qualifying cost and expenses.
11. Can an invoice appear in two categories?
Keep the mapping mutually exclusive to prevent double counting.
12. Does a normal bank deposit prove the scheme condition?
No. Verify the specified scheme account and timing.
13. Can the deposit be made after filing automatically?
The provision requires deposit before furnishing the return and includes the applicable section 139(1) outer limit.
14. Is later spending from the deposit additional relief again?
No. Reconcile it as utilisation of the existing deposit control.
15. Do unused balances need a later review?
Yes. The proviso addresses amounts not utilised within the relevant period.
16. Can the old section numbers be used for every later event?
No. Preserve the originating evidence and examine the later law and transition provisions.
Official sources
Income-tax Act, 1961: section 54G Department transition FAQs CBDT Notification 161/2025: Capital Gains Accounts Scheme amendments CBDT Notification 116/2006 dated 27 April 2006: location-specific urban-area schedule