Section 54GB Exemption on Start-up Investment: ITAT Allows ₹1.48 Crore Deduction
Proportionate investment qualifies, extended deadline applies and there is no ₹50 lakh cap, says Mumbai ITAT
What if a taxpayer sells a residential property worth several crores and, instead of buying another house, invests the sale proceeds in an eligible start-up?
There is a provision in the Income-tax Act specifically designed for such situations: Section 54GB.
But because the provision has several conditions, taxpayers can easily get lost in the fine print.
Is the entire sale consideration required to be invested?
Is there a ₹50 lakh ceiling?
Does the investment have to be made before 31 March 2017?
What happens if the investee company has to utilise the money for purchasing new plant and machinery?
A recent ruling of the Mumbai Bench of the Income Tax Appellate Tribunal answers several of these questions.
In Jyotsna Kunwar v. Income-tax Officer [2026] 185 taxmann.com 93 (Mumbai – Trib.), the Tribunal allowed a ₹1.48 crore deduction under Section 54GB on a proportionate basis.
And, importantly, it rejected the Revenue’s contention that Section 54GB carried a ₹50 lakh cap.
The transaction
The assessee sold an immovable residential property for approximately ₹4.40 crore.
The long-term capital gain was determined at approximately ₹1.76 crore.
Instead of investing the entire net consideration in another residential property, the assessee invested approximately ₹3.69 crore in equity shares of APL, an eligible start-up.
The assessee claimed deduction of approximately ₹1.48 crore under Section 54GB on a proportionate basis.
The Assessing Officer, however, was not convinced.
Several objections were raised.
Revenue’s objections
The Assessing Officer’s objections included:
1. The assessee had not invested the entire net consideration.
2. Section 54GB was allegedly not applicable to transfers made after 31 March 2017.
3. Confirmation/compliance from the investee company had allegedly not been received.
4. The Assessing Officer took the view that investment under Section 54GB was subject to a ₹50 lakh limit.
On the face of it, these objections could make the exemption appear difficult.
But the Tribunal examined the actual statutory provisions and the evidence.
The assessee ultimately succeeded.
First principle: Section 54GB can work proportionately
One of the most useful aspects of the ruling is that the assessee did not invest the entire net consideration in the eligible start-up.
Yet the exemption was not automatically lost.
Instead, the Tribunal accepted the proportionate exemption.
This is important because Section 54GB works through a proportionate formula.
In simple terms, where only part of the net consideration is invested in the prescribed manner, the exemption is correspondingly linked to the proportion of investment.
So taxpayers should not assume:
“I did not invest 100%, therefore I get zero exemption.”
That is not necessarily how Section 54GB operates.
Understanding the proportionate formula
Suppose:
– Net consideration = ₹4 crore
– Investment in eligible start-up = ₹3 crore
– Long-term capital gain = ₹1.60 crore
The eligible exemption would broadly be linked to the proportion of the investment to the net consideration, subject to the statutory formula and all other conditions.
Thus, if 75% of the net consideration is invested, the exemption can correspondingly operate on 75% of the capital gain.
This makes Section 54GB considerably more flexible than a simple “invest everything or lose everything” provision.
In the present case, the assessee’s investment and the statutory formula resulted in a deduction of approximately ₹1.48 crore.
Second issue: Was Section 54GB available for this transaction?
The Assessing Officer also questioned whether Section 54GB was available because of the date of transfer.
This objection arose from the changes made to the provision and the original time limits associated with the benefit.
The Tribunal noted that the benefit of Section 54GB had been extended up to 31 March 2022.
Therefore, the assessee’s investment fell within the extended framework.
This is an important reminder in tax law:
Never stop at the original sunset date of an exemption.
Sections providing time-bound incentives are frequently amended.
A provision that appears to have expired may have subsequently received an extension.
The law applicable to the relevant assessment year and transaction date must therefore be checked carefully.
The ₹50 lakh myth
Now comes the most interesting part.
The Assessing Officer believed that there was a ₹50 lakh cap on the investment under Section 54GB.
The Tribunal rejected this view.
It found that the provisions of Section 54GB did not prescribe such a ₹50 lakh ceiling for the investment in the manner assumed by the Assessing Officer.
Therefore, the restriction had no legal basis.
This is a classic example of why tax provisions should be read carefully rather than relying on an assumed monetary ceiling.
A number appearing in one provision, amendment or related condition can sometimes be mistakenly carried into another provision.
But:
A tax limit must come from the statute.
It cannot be created merely because it sounds familiar.
Third issue: What if the start-up has to utilise the money?
Section 54GB is not merely about the taxpayer subscribing to shares.
There are conditions concerning the utilisation of the subscription money by the eligible company/start-up, including purchase of new plant and machinery within the prescribed framework.
This creates an additional layer of compliance.
The taxpayer may have invested the money correctly.
But the tax benefit can still become vulnerable if the eligible company does not fulfil the prescribed utilisation requirements.
In the present case, however, the assessee was able to furnish:
– Confirmation from the investee company; and
– Financial statements of the company.
These documents established that the subscription money had been utilised in the required manner for purchase of new plant and machinery.
The Tribunal therefore accepted compliance with the relevant condition.
The start-up’s compliance can affect the investor’s exemption
This is a very important practical point for anyone considering Section 54GB.
The investment is made by the taxpayer.
But some statutory conditions are linked to what the eligible company does with the money.
Therefore, before investing for Section 54GB purposes, the investor should not merely ask:
“Is this company a start-up?”
The investor should also ask:
“Can this company satisfy and document the utilisation conditions prescribed under Section 54GB?”
A certificate or confirmation from the company may become extremely important during assessment.
Why Section 54GB deserves more attention
Most taxpayers are familiar with:
– Section 54 — investment in another residential house;
– Section 54F — investment in residential house where the original asset is not a residential house.
But Section 54GB provides a different route.
It can facilitate investment of capital gains arising from the transfer of a residential property into equity shares of an eligible start-up, subject to the detailed statutory conditions.
For an entrepreneur, promoter or investor looking to deploy capital into a qualifying business, this can be an interesting alternative.
The provision essentially creates a bridge between:
Capital gains from residential property → Investment in an eligible start-up.
Section 54GB is not a “free pass”
The favourable ruling should not be misunderstood.
Section 54GB has detailed conditions.
Among other things, the taxpayer needs to examine:
– Nature of the original asset;
– Date of transfer;
– Nature and quantum of capital gain;
– Amount of net consideration;
– Investment in equity shares;
– Eligibility of the company/start-up;
– Prescribed ownership conditions;
– Utilisation of subscription money;
– Purchase of qualifying new plant and machinery;
– Time limits; and
– Lock-in and other statutory requirements applicable to the relevant transaction.
Missing one important condition can jeopardise the exemption.
So, Section 54GB is generous — but it is not casual.
Documentation is critical
The Jyotsna Kunwar decision also demonstrates the importance of evidence.
A taxpayer intending to claim Section 54GB should maintain a dedicated file containing:
Property sale documents
– Sale deed;
– Sale consideration details;
– Transfer expenses;
– Capital-gain computation.
Investment documents
– Share subscription agreement;
– Bank payment proof;
– Share certificates/demat statement;
– Company incorporation and eligibility documents.
Start-up compliance
– Confirmation from the company;
– Financial statements;
– Evidence of utilisation of subscription money;
– I nvoices for new plant and machinery;
– Payment records; and
– Other documents establishing compliance with the statutory conditions.
The investor should ideally obtain these documents before the assessment begins.
Waiting until the Assessing Officer asks for them can create unnecessary complications.
A ₹1.48 crore exemption is not a small number
The amount involved in the case is worth noticing.
The assessee invested approximately ₹3.69 crore in the eligible start-up and claimed approximately ₹1.48 crore as deduction under Section 54GB.
The Tribunal accepted the claim.
This demonstrates that Section 54GB is not merely a theoretical provision applicable to small investments.
Where the conditions are satisfied, the tax benefit can be substantial.
What taxpayers should learn from the case
There are at least four practical takeaways.
1. Partial investment does not necessarily destroy the exemption
The statutory proportionate formula can provide relief even where the entire net consideration is not invested.
2. Always check amendments and extensions
The original cut-off date is not necessarily the final cut-off date.
3. Do not accept an assumed monetary cap
If the Department says there is a ₹50 lakh limit, ask:
“Where does the Act prescribe it?”
4. Obtain evidence from the investee company
The company’s utilisation of funds can be a critical condition, so the investor should obtain proper confirmation and supporting financial evidence.
The larger lesson
Tax exemptions are often defeated not because the taxpayer’s transaction was fundamentally wrong, but because the taxpayer or the Assessing Officer misunderstood the precise statutory mechanics.
The present ruling is a good reminder.
The assessee did not invest the entire net consideration.
Yet proportionate relief was available.
The original deadline had changed.
The ₹50 lakh ceiling assumed by the Assessing Officer had no statutory basis.
And the utilisation condition was supported by the investee company’s confirmation and financial statements.
The Tribunal therefore allowed the Section 54GB benefit.
The message is simple
When claiming a tax exemption, don’t read the headline. Read the formula.
For Section 54GB, four questions should be asked:
How much was invested?
Was the investment within the extended time?
Is the company genuinely an eligible start-up?
Has the company used the money in the prescribed manner?
If the answers are properly documented, a large capital-gain exemption may be available.
And if the Department proposes a monetary ceiling, the next question should be even simpler:
“Please show me where the Act says so.”
Case: Jyotsna Kunwar v. Income-tax Officer
Citation: [2026] 185 taxmann.com 93 (Mumbai – Trib.)
Date: 26 March 2026
Assessment Year: 2022-23
Provision: Section 54GB
Investment: Approximately ₹3.69 crore in equity shares of an eligible start-up
Exemption claimed: Approximately ₹1.48 crore
Decision: Deduction allowed on proportionate basis.
Key principles: Section 54GB benefit was available within the extended period up to 31 March 2022; proportionate exemption was permissible; no ₹50 lakh cap existed as assumed by the Assessing Officer; utilisation of subscription money was established through confirmation and financial statements of the investee company.
The copy of the order is as under:
