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Quick Snapshot: Understand This in 2 Minutes
India created Special Economic Zones (SEZs) to attract investment and promote exports. Section 88 uses capital gains exemption to encourage industrial units to relocate from urban areas into SEZs.
The mechanics are identical to Section 87. But where Section 87 requires the destination to be a non-urban area, Section 88 requires the destination to be an SEZ. An SEZ can be in an urban or a non-urban area.
Simple version: shifting to any SEZ from an urban area earns you a capital gains exemption. The whole setup works exactly like Section 87.
Section 87 vs Section 88: A Side-by-Side Comparison
| Aspect | Section 87 (old 54G) | Section 88 (old 54GA) |
| Asset sold | Machinery, plant, building, land of urban industrial unit | Same |
| Destination | Any non-urban area | Any Special Economic Zone (urban or non-urban) |
| Qualifying reinvestments | New P&M, building, land in new area; shifting expenses | Same, but in the SEZ |
| Time limit | 1 year before or 3 years after transfer | Same |
| Exemption formula | Lower of: CG or reinvestment | Same |
| Gain types covered | STCG and LTCG | Same |
| Lock-in and withdrawal | Sell new asset within 3 years: cost adjusted | Same |
| Who can claim | Any person | Any person |
What Is an Urban Area? (Section 88(5))
Section 88(5) states that urban area has the same meaning as under Section 87. In other words, it is any area within the limits of a municipal corporation or municipality notified by the Central Government as an urban area for these sections.
What Is an SEZ?
An SEZ is a Special Economic Zone notified under the Special Economic Zones Act, 2005. It is a specifically delineated duty-free enclave. SEZs can be located anywhere in India, including in urban areas. That is what makes Section 88 distinct from Section 87: you are not required to go to a rural area. You just need to go to an SEZ.
What Qualifies as Reinvestment?
The reinvestment categories are identical to Section 87:
- New machinery or plant for the SEZ business.
- Land or building acquired or constructed in the SEZ.
- Expenses on shifting the original asset and establishment to the SEZ.
- Other purposes specified in a scheme notified by the Central Government.
How Much Exemption Do You Get?
The exemption equals the lower of:
(a) the capital gain, or
(b) the total qualifying reinvestment cost.
Example 1: Full Exemption
A company shifts its manufacturing unit from an urban area to an SEZ. Capital gain on old factory assets = Rs. 80 lakh. Total spend on new SEZ assets and shifting = Rs. 90 lakh. Exemption = Rs. 80 lakh (full gain). Tax = Rs. 0.
Example 2: Partial Exemption
A firm shifts to an SEZ. Capital gain = Rs. 80 lakh. Total reinvestment = Rs. 75 lakh. Exemption = Rs. 75 lakh. Taxable capital gain = Rs. 5 lakh.
Lock-In and Withdrawal
Same as Section 87. If you sell the new SEZ asset within 3 years of purchase or construction, the cost of acquisition is reduced by the amount of capital gain that was exempt. This means a higher capital gain on the subsequent sale.
CGAS for Section 88
If reinvestment is not complete by the ITR filing date, deposit the unused capital gain in a CGAS account before filing. You have 3 years from the date of sale to use those funds in the SEZ.
Practical Compliance Checklist
- Shifting to an SEZ from an urban factory? Confirm your origin factory is in a notified urban area under Section 88(5).
- Confirm the destination is a validly notified SEZ under the Special Economic Zones Act, 2005.
- Keep bills, purchase agreements, and shifting invoices for every qualifying expense in the SEZ. All of these count toward the reinvestment amount.
- Use the 1-year-before window. If you have already invested in SEZ assets before selling the urban unit, those costs may count.
- Deposit unused gains in CGAS before the ITR date. Complete reinvestment within 3 years.
- Maintain the new SEZ asset for at least 3 years. Early sale reverses the exemption benefit.
Section 88 is a targeted incentive for industrial units to move into SEZs. If you are already planning an SEZ entry, this section makes the transition completely tax-efficient. The mechanics mirror Section 87 exactly, with the SEZ as the qualifying destination. Plan the reinvestment, document the expenses, and the capital gains tax on your urban exit becomes zero.
