Most people know Section 54/54F lets you save capital gains tax by buying another house. Fewer know there's a section that lets you save the same tax by investing in a startup instead - aimed squarely at angel investors and family members backing early-stage companies.
Section 54GB provides an exemption from long-term capital gains tax on the sale of a residential property (house or plot of land with a residential house), where the net consideration is invested in equity shares of an "eligible startup", subject to several conditions. This section was designed to channel capital from property sales into India's startup ecosystem while giving the seller a tax incentive.
The exemption is available to individuals and HUFs who:
| Condition | Requirement |
|---|---|
| Incorporation | A company incorporated in India during the period specified under the relevant notification (extended periodically by the government) |
| Recognition | Must be recognized as an "eligible startup" by DPIIT (Department for Promotion of Industry and Internal Trade) |
| Shareholding condition | The individual/HUF must hold more than 25% of the share capital or voting rights of the company after the subscription (or such other percentage as may be specified) |
| Turnover limit | The startup's turnover must not exceed the prescribed limit (as per the startup definition under the relevant notification) in any of the years since incorporation |
The startup company receiving the investment must utilize the amount for the purchase of new plant and machinery (or as otherwise specified for certain categories of startups, such as those in technology-driven sectors) within one year from the date of subscription of shares. If the amount is not utilized as required, the exemption may be withdrawn and the gain becomes taxable in the hands of the investor in the year the condition is violated.
The equity shares (or the assets purchased by the startup using the proceeds) are typically subject to a lock-in period of 5 years (this has been adjusted over various Finance Acts; always check the currently applicable period). If the shares are sold, or the company transfers the asset purchased, before this lock-in expires, the previously exempted capital gain becomes taxable as long-term capital gains in the year of such transfer.
| Aspect | Section 54 | Section 54F | Section 54GB |
|---|---|---|---|
| Asset sold | Residential house | Any long-term capital asset (not a residential house) | Residential house or plot of land |
| Reinvestment in | Another residential house | A residential house | Equity shares of an eligible startup (>25%/50% stake) |
| Lock-in | 3 years (for the new house, broadly) | 3 years (for the new house) | 5 years (shares/assets) |
| Typical use case | Selling one home to buy another | Selling land/other assets to buy a first/only home | Selling property to fund a startup you'll have significant control in |