The industrial-use test comes before the investment calculation
Section 54D of the Income-tax Act, 1961 can apply to a company, but not to every sale of factory property. It concerns compulsory acquisition under law of land, a building or a right in them forming part of the assessee’s industrial undertaking, used by the assessee for that undertaking’s business in the two years immediately preceding transfer. Establish the acquisition’s legal basis, ownership and use before calculating relief. A voluntary sale followed by a factory purchase does not establish the compulsory-acquisition condition.
Read the applicable text: Income-tax Act, 1961: sections 54D and 54H Department transition FAQs CBDT Notification 161/2025: CGAS amendments Income Tax Department: interplay and transition FAQ Q8.28 Income Tax Department: CGAS Form A including section 54D.
Define the replacement asset and its purpose
Section 54D(1) identifies purchase of other land/building or a right in them, or construction of another building, for shifting or re-establishing the undertaking or setting up another industrial undertaking. The ordinary period is three years after transfer. Machinery expenditure or general working capital should not be counted as qualifying land/building cost merely because it supports the relocation. Maintain an itemised project ledger with eligibility decisions, rather than one total capital-expenditure number. This guide assumes the capital gain has been independently computed correctly.
Apply the gain-versus-cost comparison
Where capital gain exceeds qualifying new-asset cost, the difference remains chargeable under section 45. Where qualifying cost equals or exceeds the gain, section 54D’s comparison shelters the gain, subject to the remaining conditions. The relief is the lower of the independently computed gain and qualifying cost, subject to all conditions. Comparing gross compensation with replacement cost instead would use the wrong base. Separate compensation, allowable original-asset cost, gain and qualifying replacement expenditure. Short-term or long-term character must still be determined; section 54D is not restricted by its text to long-term gains alone.
Control the unutilised amount and the relevant clock
Under section 54D(2), gain not used for the qualifying purchase/construction before furnishing the section 139 return must be deposited in the Capital Gains Accounts Scheme, 1988 account before furnishing it, and in any case not later than the applicable section 139(1) due date. Already utilised amounts plus qualifying deposits feed the statutory computation. Do not assume an ordinary bank balance is a scheme deposit. Notification 161/2025 dated 19 November 2025 added electronic payment modes and amended Form A. Subject to realisation, the effective deposit date is when the deposit office receives the payment together with the relevant application, not merely when an internal payment instruction is created. The notification requires electronic account-closure options from 1 April 2027; that future requirement should not be presented as already operative during FY 2025–26. Section 54H separately shifts the specified acquisition/deposit/investment period to receipt of compensation where compulsory-acquisition compensation was not received on the transfer date, to the extent concerned. Use a receipt-wise chronology; the simple examples assume compensation was received on transfer and no section 54H extension.
Preserve the later-use and early-disposal controls
If a qualifying deposit is not used wholly or partly within the prescribed period, section 54D(2)’s proviso charges the unused amount in the year the relevant three-year period expires and permits withdrawal in accordance with the scheme. Section 54D(1) also modifies new-asset cost for its transfer within three years of purchase/construction: cost is nil in clause (i), or reduced by the exempted gain in clause (ii). These are separate controls; do not treat a scheme withdrawal as proof that all exemption conditions were met.
Keep the income-period law explicit
This article addresses FY 2025–26/AY 2026–27 under the 1961 Act. The Department’s transition FAQ Q8.28 specifically explains that a qualifying CGAS deposit made before 1 April 2026 continues under the applicable conditions and its unutilised portion is taxed in the expiry year under the transition framework. Do not assume that a later expiry makes the original utilisation conditions disappear. Later utilisation, disposal and reporting must be checked against the applicable transition provisions and law for that later period; the examples show the section 54D computation mechanics, not an instruction to use old section numbers indefinitely. Filing-date extensions depend on taxpayer class and should be established separately when setting the deposit control. No universal calendar filing date 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: Qualifying expenditure below the gain
Assume all conditions are met and the independently computed gain is ₹40 lakh. Qualifying new industrial land/building cost is ₹25 lakh. The relief comparison is ₹25 lakh and the remaining gain ₹15 lakh. Total compensation proceeds are not substituted for the ₹40 lakh gain in this test.
Illustrative example 2: Cost above the gain
A qualifying gain is ₹30 lakh and eligible replacement cost ₹42 lakh. The gain sheltered is ₹30 lakh, not ₹42 lakh. For the section 54D clause (ii) early-disposal cost working, ₹42 lakh − ₹30 lakh leaves ₹12 lakh, subject to the later transaction’s governing law.
Illustrative example 3: Separate machinery expenditure
A project spends ₹20 lakh on qualifying land/building and ₹15 lakh on machinery. With a ₹35 lakh qualifying gain, the assumed eligible reinvestment is ₹20 lakh, leaving ₹15 lakh outside this relief comparison. Merely totalling ₹35 lakh of project spending would obscure the statutory asset categories.
Illustrative example 4: Used plus qualifying deposit
Gain is ₹50 lakh. Before filing, ₹18 lakh is validly used and ₹32 lakh is deposited in the prescribed scheme within the applicable time. The computation considers ₹18 lakh + ₹32 lakh = ₹50 lakh, subject to future utilisation. A ₹32 lakh ordinary current-account balance would not establish that scheme-deposit condition.
Illustrative example 5: Part of the deposit remains unused
Assume the full ₹24 lakh scheme deposit was within the qualifying gain and sheltered under the original computation. It is followed by qualifying use of ₹17 lakh within the applicable period. The unused amount is ₹7 lakh. Section 54D(2)’s proviso requires the relevant expiry-year charge and scheme-withdrawal analysis for that ₹7 lakh, rather than assuming the whole original deposit remains exempt permanently.
Illustrative example 6: Early-disposal cost under clause (i)
Gain of ₹28 lakh exceeded qualifying new-asset cost ₹20 lakh, leaving ₹8 lakh chargeable in the initial comparison. For a transfer of the new asset within the prescribed three-year period, clause (i)’s cost is nil, rather than ₹20 lakh. Assuming disposal consideration ₹26 lakh and no other computation adjustments, the illustrative gain using that nil cost is ₹26 lakh. Review the actual later-period law and applicable special provisions before reporting.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the FY and AY | Applicable Act and transfer/receipt chronology. |
| 2 | Prove compulsory acquisition | Award and legal acquisition documents. |
| 3 | Verify industrial use | Two-year use evidence and asset ownership. |
| 4 | Compute the original gain independently | Compensation, tax cost and applicable adjustments. |
| 5 | Identify qualifying replacement assets | Land/building/right and industrial purpose. |
| 6 | Exclude unsupported project costs | Machinery and other expenditure separately classified. |
| 7 | Set the relevant clocks | Transfer, compensation receipt and section 54H analysis. |
| 8 | Check pre-filing utilisation/deposit | Specified account evidence and applicable due date. |
| 9 | Track utilisation and early disposal | Deposit roll-forward and replacement-asset history. |
| 10 | Approve the reporting bridge | Gain, relief, taxable balance and later controls. |
Sixteen practitioner FAQs
1. Can a company claim section 54D?
The provision is not confined to individuals or HUFs; all relevant conditions must still be met.
2. Does a voluntary factory sale qualify merely because a replacement is bought?
No. The compulsory-acquisition requirement must be established.
3. What original assets are described?
Land, building or a right in land/building forming part of the industrial undertaking.
4. What use period is required?
Business use for the undertaking in the two years immediately preceding transfer.
5. Is machinery automatically qualifying replacement cost?
No. The identified replacement categories concern land/building/rights and construction of a building.
6. Must the same undertaking be recreated identically?
The text includes shifting, re-establishing or setting up another industrial undertaking, subject to the actual facts.
7. Is relief measured against gross compensation?
The section compares capital gain and qualifying replacement cost, not compensation alone.
8. Is the section only for long-term gains?
Its text does not impose that restriction; independently determine the gain’s character.
9. What is the ordinary reinvestment period?
Three years after transfer, subject to the applicable section 54H analysis where compensation is delayed.
10. Can an ordinary bank account replace the prescribed scheme account?
No. Establish the specified scheme deposit and its conditions.
11. Can deposit wait until a later belated-return date automatically?
Section 54D(2) expressly includes the applicable section 139(1) due-date limit, alongside the before-filing requirement.
12. What if compensation arrives after transfer?
Examine section 54H and the receipt chronology for the specified extended period.
13. Is an unused scheme balance permanently exempt?
No. The proviso addresses unused amounts at the relevant period’s expiry.
14. Does early replacement-asset disposal affect cost?
Yes. Apply the applicable clause (i) nil-cost or clause (ii) reduced-cost rule.
15. Does this guide determine a universal company filing deadline?
No. Verify the relevant taxpayer class and any applicable extensions separately.
16. Do old section numbers govern every later event automatically?
No. Retain the originating relief evidence and examine the law and transition provisions applicable to the later event.
Official sources
Income-tax Act, 1961: sections 54D and 54H Department transition FAQs CBDT Notification 161/2025: CGAS amendments Income Tax Department: interplay and transition FAQ Q8.28 Income Tax Department: CGAS Form A including section 54D