Definition: Capital Asset
The term capital asset does not include personal effects such as wearing
apparel, furniture, air conditioners, refrigerators, etc., held for personal use
by the assessee. Even cars, scooters, cycles, motorcycles owned and used by the
assessee are personal effects. Therefore, the sale of personal effects does not
attract any capital gains tax.
We have a suggestion. A car used for personal purpose (depreciation is not charged), is not a capital asset. When it is sold, no capital gains arise. The profit or loss cannot be brought to income tax.
It is obvious that the returning NRIs will do well by bringing their cars with them
and sell these in due course.
Agriculture
Sec. 2(14iii) defines capital asset and Sec. 2(1A) defines agricultural income.
Accordingly, an agricultural land is one which is not situated within a certain
distance from the local limits of any municipality, cantonment board, etc., having
a certain amount of population according to the last preceding census. Accordingly,
the distance, as measured aerially (as the crow flies) should not exceed:
a) 2 kilometres where population is between 10,000 and 1 lakh.
b) 6 kilometres where population is between 1 and 10 lakh.
c) 8 kilometres where population is more than 10 lakh.
Obviously, the provisions bring the income from the land within the fold of agricultural
land if and only if it is located nearer to the less populated area.
Rural agricultural land is not a capital asset. Consequently, its sale would not
attract provisions of capital gains tax. Looking at it from another angle, sale
of all lands, agricultural or not,
located in urban areas and non-agricultural land located in rural areas would attract
the tax.
However, gains arising out of compulsory acquisition of such an agricultural land
irrespective of its location are exempt u/s 10(37).
Transactions not Regarded as Transfer
Following are some of the transactions related with NRIs which are not considered
as transfer:
1. Sec. 47(iii): Assets transferred under a gift or a Will or an irrevocable trust. This essentially means that --- For computing LTCG arising out of the subsequent sale by the donee or the legatee, the cost of the property is the cost incurred by the donor when he originally acquired it. If this original holder has also acquired the property by way of gift or inheritance, then it will be the cost of very first holder who purchased or constructed the property. If this date is prior to 1.4.01, the FMV as on 1.4.01 can be optionally taken as the cost of acquisition.
2) Sec. 47(ix): Transfer of any work of art, archaeological, scientific or art collection,
etc., to the government or a university or the National Museum, National Art Gallery,
etc.
3. Sec. 47(x): Conversion of debentures, debenture stock or deposit certificates, preference shares of a company into its shares or debentures. FA17 has extended this neutrality to the conversion of a company into its equity share.
4. Sec. 47(vii): In the case of shares of companies, mergers and amalgamations are not treated as transfer. Also, merger of different schemes of MF as well as the merger of different options within the same scheme is tax neutral. Period of holding shall include the period for which the units in consolidating scheme were held by the assessee and the cost of acquisition of the allotted units shall be the cost of units in the consolidating plan.
5. Sec. 47(viic): Rupee denominated Sovereign Gold bonds can be issued by Indian corporates outside India. Tax on capital gains has to be paid if these bonds are sold or transferred before their redemption but not on their redemption. Any transfer of such bonds by an NRI to another NRI is not regarded as transfer.
6. Sec. 47(viiaab) provides that any transfer of a Bond or GDR referred to in Sec. 115C(1) or rupee denominated bond of an Indian company or derivative, made by an NRI on a recognised stock exchange located in any International Financial Service Centre and where the consideration is paid or payable in forex, shall not be regarded as transfer.
7. Sec. 43AA provides that any gain or loss on a transaction arising from any change in forex rates shall be treated as income (or loss). Such transactions include those relating to monetary/non-monetary or translation of financial statements of foreign operations or forward exchange contracts or forex translation reserves.
8. CBDT Circular 4/2015 dt 26.3.15 has clarified that declaration of dividend by a foreign company outside India does not have the effect of transfer of any underlying assets located in India and therefore, the dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets situated in India would not be deemed to be income accruing or arising in India by virtue of Explanation-5 to Sec. 9(1i).
Purchases in Cash
As per Sec. 43 any cash payments in capital expenditure above ₹10,000 shall not be considered to determine actual cost of asset u/s 43(1). Moreover, no deductions shall be available u/s 35AD, including depreciation for such expenditure. It will be income chargeable to tax.
Capital Gains Tax: Sec. 112
A ‘Short-term capital asset’ (ST) is a financial asset held for 36 months or less immediately preceding the date of transfer. The holding period is only 12 months for shares of a company, units of MFs, zero coupon bonds and listed scrips, bonds, debentures. An asset which is not ST is LT (Long-term).
The holding period is 24 months in the case of — (i) immovable property, being land or building or both and (ii) unlisted equity shares.
Sec. 112(1c) states that the share of company in which public are not substantially interested shall also be chargeable to tax @10%.
FA14 has taken away debt-based MF schemes from this concessional lower period of 12 months. The normal period of 36 months will be applicable.
Note the word ‘held’ in this provision. The assessee need not be an owner of the property and can hold it as a lessee, as a mortgagee, under a hire purchase agreement, or on account of part performance of an agreement.
In the case of other financial assets like houses, jewellery, etc., STCG is taxed like any other income at the rates applicable to the assessee. LTCG is taken as a separate block, charged to tax at a flat rate of 20% with indexation benefit. The benefit of gap between the tax threshold and normal income is not available to NRIs.
Cost Inflation Indexation (CII)
Sec. 55 allows the cost of acquisition of an asset acquired before 1.4.2001 to be taken as FMV as on 1.4.2001 and the cost of improvement shall include only those capital expenses which are incurred after 1.4.2001. Indexed cost is arrived at by multiplying the cost with the ratio of CIIs for the year of sale and that of acquisition.
Table-1: Cost Inflation Index
FY
|
Inflation Index
|
Growth %
|
FY
|
Inflation Index
|
Growth %
|
01-02
|
100
|
-
|
12-13
|
200
|
8.70
|
02-03
|
105
|
5.00
|
13-14
|
220
|
10.00
|
03-04
|
109
|
3.81
|
14-15
|
240
|
9.09
|
04-05
|
113
|
3.67
|
15-16
|
254
|
5.83
|
05-06
|
117
|
3.54
|
16-17
|
264
|
3.94
|
06-07
|
122
|
4.27
|
17-18
|
272
|
3.03
|
07-08
|
129
|
5.74
|
18-19
|
280
|
2.94
|
08-09
|
137
|
6.20
|
19-20
|
289
|
3.21
|
09-10
|
148
|
8.03
|
20-21
|
301
|
4.15
|
10-11
|
167
|
12.84
|
21-22
|
317
|
5.31
|
11-12
|
184
|
10.18
|
22-23
|
To be announced
|
LTCG is computed by deducting from the full value of the consideration (i) any expenditure (brokerage, stamp duty, etc.) incurred in connection with the transfer, (ii) indexed cost of acquisition and (iii) indexed cost of improvement.
For assets acquired prior to 1.4.2001 the option of substituting the fair market value (FMV) in place of original cost is available. In other words, if the cost of acquisition is lower than FMV as on 1.4.2001, the assessee may adopt the FMV as his cost. If it is higher, he may adopt it as his cost of acquisition. The CII based on 2001-02 only will be considered, whatever is the choice for the cost.
An assessee has the right to take the FMV as on 1.4.2001 even for bonus shares allotted to him prior to that date. Same is true for other assets, normally required to be taken at nil (or lower) value.
Cost of Acquisition in Some Special Cases
1. The cost of acquisition should be taken as nil in for computing capital gains the following cases:
a) Goodwill.
b) Trademark or brand name associated with the business.
c) Patent, copyright, formula, design, etc.
d) Right to carry on any business.
e) Cost of acquisition’ and ‘cost of improvement’ of right to carry on any profession.
f) Tenancy rights, permits, Loom hours, etc.
g) Most importantly --- Bonus shares.
2. As per Sec. 45(1A), tax will be charged on any gains arising from money or other assets received under an insurance arising out of damage to, or destruction of any capital asset, as a result of (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature or (ii) riot or civil disturbance or (iii) accidental fire or explosion or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war).
The logic behind this diktat is --- “Transfer presumes the existence of both the asset and the transferee.” Under such situations both are absent.
3. As per Sec. 50D, where the actual purchase consideration is not attributable or determinable, the then existing FMV of the asset shall be deemed to be the full value of consideration.
4. FA21 clarified that depreciation cannot be charged on such intangible assets even when it is acquired at a cost.
Where goodwill is purchased by an assessee, the purchase price of the goodwill shall continue to be considered as cost of acquisition for computation of capital gains u/s 48 subject to the condition that in case depreciation was obtained by the assessee in relation to such goodwill prior to the FY 20-21, then this depreciation shall be reduced from the amount of the purchase price of the goodwill. The recent FA22 has clarified that reduction of the amount of goodwill of a business or profession, from the block of asset u/s 43, shall be deemed to be transfer, w.r.e.f. FY 20-21
5. Fortunately, any compensation paid by a redeveloper to flat owner due to the hardship caused to the taxpayer (cost incurred is nil) continues to be non-taxable as per several court verdicts. The latest one (2016 (8) TMI 1087 ITAT Mumbai) involves Jitendra Kumar Soneja who had received a sum of ₹22 lakh as compensation from the redeveloper and ₹8.55 lakh for paying rent as he had to vacate his flat. The ITAT held that ₹22 lakh received as a corpus fund, is a capital receipt and not taxable. Going a step further, ITAT stated that while the compensation was a capital receipt and not taxable, it would be reduced from the cost of acquisition of the flat. This would have a tax impact, in case the redeveloped flat was subsequently sold. However, as Soneja had incurred a rent expenditure of only ₹6.80 lakh as against ₹8.55 lakh, the balance of ₹1.75 lakh liable to tax.
Sale Value for Stamp Duty — Sec. 50C
As per Sec. 50C, where the consideration declared to be received or accruing because of transfer of land or building or both, is less than the stamp duty value by 10%, it is the stamp duty value that shall be deemed to be the full value of the consideration and capital gains shall be computed based on such consideration u/s 48. In othe words, where the value adopted or assessed or assessable by the stamp valuation authority does not exceed 110% of the consideration received or accruing because of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of Sec. 48, be deemed to be the full value of the consideration.
FA21 has raised this safe harbour threshold from existing 10% to 20% if ---
a) The transfer of residential unit takes place during 12.11.20 and 30.6.21.
b) The transfer is by way of first-time allotment of the residential unit to the person and
c) The consideration received or accruing as a result of such transfer does not exceed ₹ 2 crore.
Accordingly, for these transactions, stamp duty rate shall be deemed as sale/purchase consideration only if the variation between the agreement value and the stamp duty rate is more than 20%.
Where the abovementioned conditions are not satisfied, the original cap of 10% is applicable.
STCG is the difference between the net sale proceeds and the cost of acquisition without indexation.
KRA Holding & Trading P. Ltd. 26Taxmann.com48 (2012) has held that any fee paid to portfolio manager is construed to have been expended for the purpose of acquisition and/or transfer of securities and therefore it would be deductible.
Security Transaction Tax (STT)
STT is a minuscule amount of tax (0.1%) collected from the following transactions taking place in a recognised stock exchange in India:
(a) Purchase and sale of shares.
(b) Sale of equity based MFs.
(c) Sale of Options in securities.
(d) Sale of Futures in securities.
STT is also charged on redemption of equity-based units of MFs (but not on debt-based), directly with the fund house which had issued these units. The LTCG was exempt (note the past tense) and STCG is taxed and continues to be taxed at a concessional rate of 15%, only if the sale transaction has suffered STT.
CTT is close cousin of STT for commodities.
Large Scale Amendments by FA18
In the case of capital gains arising out of shares and securities and equity-based units of MFs or a unit of business Trust sold on a Recognised Stock Exchange in India or repurchased directly from MFs, STT is payable and therefore —
(a) LTCG was exempt u/s 10(38).
(b) STCG was and continues to be taxed @15% flat, u/s 111A.
This exemption u/s 10(38) was misused by certain persons for declaring their unaccounted income as exempt LTCG by entering sham transactions. To address this abuse, FA18 has implemented large-scale amendments by making Sec. 10(38) non-operative and introducing a new Sec. 112A. Consequently —
1. The LTCG will be computed without giving effect to the 1st proviso to Sec. 48 dealing with CII and the 2nd proviso dealing with foreign currency in the case of NRIs.
2. Such LTCG shall be taxed @10% if STT has been paid on both acquisition and transfer. The requirement of STT being paid at the time of acquisition shall not apply to purchases made before 1.4.2004 when STT was introduced.
3. The tax of 10% is applicable only on amount of capital gain exceeding ₹1 lakh.
4. The cost of acquisitions in respect of the long-term capital asset acquired by the assessee before 1.2.2018 shall be deemed to be the higher of –
a) the actual cost of acquisition of such asset; and
b) the lower of i) the ‘Fair Market Value’ (FMV) of such asset; and ii) the full value of consideration received or accruing on the transfer of such asset.
5. FMV for this new Section has been defined to mean –
a) In a case where the capital asset is listed on any recognised stock exchange, the highest price of the capital asset quoted on such exchange on 31.1.18. Where there is no trading in such asset on that date, the FMV shall be its highest price on a date immediately preceding date when it was traded.
b) In a case where the capital asset is a unit not listed on recognised stock exchange, its NAV on 31.1.18.
6. The benefit of deduction under chapter VI-A as well as the rebate u/s 87A and the exemption u/s 54EC is not available on such capital gains.
7. The STCG arising from sale of equities of shares purchased after 1.4.18 can be set-off against other gains or carried forward for 8 years as per the normal terms and conditions.
8. Notification S.O. 1789(E) dt 5.6.2017 protects genuine cases where the STT could not have been paid like acquisition of share in IPO, FPO, bonus or right issue by a listed company, acquisition by non-residents in accordance with FDI policy, acquisition under ESOP framed under SEBI Guidelines, transfer of shares approved by the Supreme Court, High Court, National Company Law Tribunal, SEBI, RBI in this behalf, any non-resident in accordance with foreign direct investment guidelines, acquisition from the Government, etc.
This is an attempt to bring private deals between parties outside the market, shares of listed companies acquired through, preferential allotments, ESOPs, etc., under the normal capital gains net. Fortunately, mergers and acquisitions are tax neutral.
Analysis
For clarity, let us take the following example —
Let us say you had purchased Maruti shares on 13.10.17 @₹7,900/share. Irrespective of this rate, the FMV will be taken @₹9,500 or thereabout, which was the highest price on 31.1.18. However, the date of purchase will remain 13.10.17 only.
The FMV will be ₹9,500 and not the rate as on 1.4.01 with one exception. If any time after 13.10.18, you sell Maruti at say
₹8,500, you will be incurring a loss of ₹1,000. In this case, your FMV will be deemed to be ₹8,500 thereby bringing your loss at nil level. In other words, you cannot set it off against your other gains.
On the other hand, if your sale price is, say ₹10,500, you will earn LTCG of ₹1,000 (without indexation) on which the tax will be @10% with associated surcharge and cess. This works out at ₹116.48. Then again, had you sold Maruti after 1.4.18 but before 13.10.17, you will have earned short-term capital gains which will be taxed @15%.
Listed securities not sold on a Recognised Stock Exchange in India (or bought on or after 1.4.04), the LTCG are taxed @10% without indexation or 20% with indexation, whichever is lower. In his budget speech FM referred to the 10% rate on listed shares as a ‘concessional’ rate and yet the tax rate on unlisted shares is more concessional. Strange!
This is a result of the tax legislation being so complicated that even the law makers appear to have lost their touch with reality.
Finally, the best thing you can do is to pocket the tax-free LTCG up to ₹1 lakh every FY.
Business of Dealing in Shares
Where dealings in shares is a business of the person, all capital gains (or losses) are charged to tax under the head, ‘Profits and gains of business or profession’. Sec. 36 provides that STT paid on transactions entered during the business shall be allowable as deduction.
Exchange Rate Risk
Protection provided by First Proviso to Sec. 48 to NRIs has been deleted even if it results in a loss, because of the introduction of 10% tax on LTCG arising out of equities and equity based MFs. However, it still is applicable on STCG arising from shares or debentures of an Indian company (private or public) acquired by utilising forex.
In such cases, capital gains shall be computed by deducting the cost of acquisition from the net value of the consideration received or accruing into the same foreign currency as was initially utilised for the purchase of shares or debentures. The capital gains so computed in such foreign currency shall be reconverted into Indian currency. Thus, the NRI is protected against the exchange risk.
Indian corporates, vide RBI’s notification dt 29.9.15, are permitted to issue rupee denominated bonds (popularly known as Masala Bonds) overseas to enable them raise funds. To protect the interest of NRI investors from exchange rate fluctuations FA16 has provided that while computing capital gains u/s 48 at the time of redemption, full value of consideration received shall exclude any gain arising on account of appreciation of rupee.
What if the rupee depreciates? We wonder . . .
FA17 has amended Sec. 48 to provide relief in respect of such gains also to secondary holders. Moreover, Sec. 47 has been amended to provide that any transfer of such bonds by an NRI to another NRI shall not be regarded as transfer.
Dates of Transfer & Registration Differ
Where the date of the agreement fixing the amount of consideration for the transfer of the immovable property and the date of registration are not the same, the stamp duty value may be taken as on the date of the agreement. This exception shall, however, apply only in a case where the amount of consideration, or a part thereof, has been paid by any mode other than cash on or before the date of the agreement.
Advance for Transfer of a Capital Asset
Amount confiscated by the seller cannot be treated as his capital gain, since no transfer of any capital asset has taken place. — CIT v Sterling Investment Corp Ltd. [1980] 123ITR441 (Bom).
Such forfeited amount was treated as a capital receipt not chargeable to tax during the year of forfeiture. This amount was reduced from the cost of acquisition of the property so that tax would get collected when the property gets sold. This provision was ingeniously used by some persons to convert their taxable earnings into capital receipts by entering into a sham agreement to sell a property to an accommodating party on the understanding that the earnest money will be forfeited as per the terms of the agreement.
To counter this situation, FA14 amended Sec. 56 to provide that any advance money taken against sale of an asset and forfeited because the negotiations did not result in transfer shall be chargeable to tax under the head ‘Income from Other Sources’.
This has resulted in punishing the buyer in genuine cases where there was no such understanding. Even if such forfeiture is a pecuniary loss, he cannot claim it as a capital loss u/s 45 as he neither ever owned nor relinquished the capital asset in question. A CBDT clarification is necessary to avoid litigations.
FA12 has curtailed the practice of receiving an exceedingly high premium against the issue of shares.
Treatment of Losses
U/s 74 losses under the head ‘Capital Gains’ cannot be set off against income under any other head. Though short-term loss can be set off against both STCG as well as LTCG, any LTCL shall be set off against LTCG only. If there are no sufficient gains during the year, the balance loss, ST or LT, can be carried forward for 8 successive years for similar set off.
Buy Back by Companies
Buy back is a corporate action in which a company buys some of its shares from the existing shareholders at a price higher than market price. This is an indirect way of paying dividend without attracting any tax (erstwhile DDT or the new normal). Sec. 115QA provides for the levy of additional Income-tax @20% of the distributed income on account of buy-back of unlisted shares by the company.
This Section was introduced as an anti-abuse provision to check the practice of unlisted companies resorting to buy-back of shares instead of payment of dividends as the tax rate for capitals gains was lower than that of DDT. However, instances of similar tax arbitrage have now come to notice in case of listed shares as well, whereby the listed companies are also indulging in such practice of resorting to buy-back of shares, instead of payment of dividends.
To curb such tax avoidance even by the listed companies, Sec. 115QA is extended to all companies including companies listed on recognised stock exchange w.e.f. 5.7.19.
As additional income-tax has been levied at the level of company, the consequential income arising in the hands of shareholders has been exempted u/s 10(34A) not only to unlisted but also to listed companies.
Sec. 54EC Bonds
These offer exemption if the capital gains are reinvested within 6 months in Bonds issued by National Highway Authority of India (NHAI), Rural Electrification Corporation (REC) and some other notified institutions. These Bonds are redeemable after 5 years. Unfortunately, the limit on such contributions is ₹50 lakh and it can be made during the FY when the CG occurs and the subsequent FY but within the stipulated period of 6 months.
Earlier all types of LTCG could have been saved by investing in these Bonds. However, FA18 has restricted the shelter of these Bonds only to LTCG arising from land or building or both. In other words, Sec. 54EC cannot be used any more for LTCG arising from shares and securities, bonds, precious metals and ornaments, archaeological collections, drawings, paintings, sculptures, any work of art, stock-in-trade, etc. Moreover, this exemption is no more available for LTCG arising out of Sec. 54F on any asset other than land.
The Bonds are non-transferable, non-negotiable and cannot be offered as a security for any loan or advance. The present interest rate is 5.25% fully taxable. There is no TDS.
Deposits in the Bonds are riddled with 2 problems. The first one is that the date of allotment is the last date of the month during which the subscription is received, irrespective of the date when the company encashes your cheque. The second one is that the face value of one Bond is ₹10,000.
Consequently, if you have earned LTCG of ₹3,000 you can either purchase Bonds worth ₹10,000 and pay tax on ₹3,000 or purchase Bonds worth ₹10,000 and pay no tax. What should you do?
For arriving at the answer to these questions, let us first find out whether it is worth buying the bonds if you have earned a round figure of LTCG worth ₹10,000.
Suppose you are in 31.2% tax zone.
If you buy the Bonds, no tax is payable and can park the entire amount of ₹10,000 therein. The maturity value of this happens to be ₹11,941.26. (See the following Table).
On the other hand, if you decide to pay capital gains tax, which is @20.8%, your take-home gain works out at ₹7,920. Now, suppose you park this in a Co-FD with a term of 5 years, with a fully taxable coupon rate of 12.44% p.a. You will find that your take home happens to be ₹11,941.26, same as that on the Bonds.
In other words, the BER of the Bonds and Co-FDs = 12.44% at the 31.20% zone. Consequently, if there is a source of FDs with comparable safety as that of Bonds, offering an interest rate of 12.44% p.a., available to you, go for the FDs. The conclusion is plain and simple. Since such safe FDs are not available in the market you should go for the Bonds.
Break-Even Rate of 54EC Bonds
Tax Rate = 31.20%
Interest Rate on Company FDs = 12.44%
Interest Rate on Bonds = 5.25%
Year
|
Opening Balance
|
Interest Received
|
Tax on Interest
|
After Tax Interest
|
Closing Balance
|
Capital Gain Bond: Locking Period 5 Years
|
1
|
10,000.00
|
525.00
|
163.80
|
361.20
|
10,361.20
|
2
|
10,361.20
|
543.96
|
169.72
|
374.25
|
10,735.45
|
3
|
10,735.45
|
563.61
|
175.85
|
387.76
|
11,123.21
|
4
|
11,123.21
|
583.97
|
182.20
|
401.77
|
11,524.98
|
5
|
11,524.98
|
605.06
|
188.78
|
416.28
|
11,941.26
|
Company FD for Term of 5 Years
|
1
|
7,920.00
|
985.26
|
307.40
|
677.86
|
8,597.86
|
2
|
8,597.86
|
1,069.58
|
333.71
|
735.87
|
9,333.73
|
3
|
9,333.73
|
1,161.13
|
362.27
|
798.85
|
10,132.58
|
4
|
10,132.58
|
1,260.50
|
393.28
|
867.23
|
10,999.81
|
5
|
10,999.81
|
1,368.39
|
426.94
|
941.45
|
11,941.26
|
The above analysis assumes that the after-tax interest generated from the Bonds is reinvested in the Bonds. Since this amount can be invested anywhere, you can reach for higher interest available in FDs. The correct BER at 31.2%, 20.8% and 5.2% zones are13.01%, 11.30% and at 5.2% respectively. Obviously, you should opt for the Bonds irrespective of the tax zones.
Now, we take up the case where the amount of capital gain is odd. Without taking you through the rigmarole of the computation, the following Table gives directly the BERs at the various zones and odd amounts. We take the current rate of 7.75% of RBI Bonds as the Benchmark. Now suppose you are in 31.20% tax zone and have earned capital gain of say, ₹25,83,000, you should opt to invest ₹25,84,000 in the CG Bonds. If your gain is lower than that level, say, ₹25,82,000 invest ₹25,00,000 in the CG bonds and pay tax on ₹2,000.
Now, if you are in the 20.80% bracket, …. Well, I am sure you know what to do.
Tax
|
BER in % of Odd Amounts in ₹Rounded Off
|
Zone
|
1,000
|
2,000
|
3,000
|
4,000
|
5,000
|
6,000
|
7,000
|
8,000
|
9,000
|
31.20%
|
6.30
|
6.95
|
7.62
|
8.31
|
9.01
|
9.74
|
10.49
|
11.26
|
12.05
|
20.80%
|
5.47
|
6.04
|
6.62
|
7.21
|
7.83
|
8.46
|
9.02
|
9.67
|
10.35
|
5.20%
|
4.57
|
5.04
|
5.53
|
6.03
|
6.54
|
7.07
|
7.61
|
8.17
|
8.75
|
All said and done, the decision to select the benchmark rate depends upon your risk appetite.
Case Laws
It is important to note the following court verdicts —
1. Investment made prior to the date of transfer out of earnest money or advance received is eligible for exemption u/s 54EC — [2012] 28taxmann.com274 Bombay (HC) Mrs. Parveen P. Bharucha v DCIT Circle 2 Pune.
2. For claim of exemption u/s 54EC, source of investment of fund is immaterial. IAC v Jayantilal C. Patel (HUF) [1988] 26ITD1 (Ahd). Surely, this verdict can be extrapolated to Sec. 54EC.
3. As per the language of Sec. 54EC, there is no requirement that investment should be in name of assessee. The only condition is that the sale proceeds of capital assets must be invested in certain specified bonds — ITO v Smt Saraswati Ramanathan [2009] 116ITD234 (Delhi).
4. Although as per Sec. 50, the profit arising from the transfer of a depreciable asset (industrial building) shall be a gain arising from the transfer of short-term capital asset, irrespective of the period of holding, but it nowhere says that the depreciable asset shall be treated as short-term capital asset. Sec. 54EC is an independent provision not controlled by Sec. 50 which is restricted only to the mode of computation of capital gain u/ss 48 and 49 and this fiction cannot be extended beyond that for denying the benefit otherwise available to the assessee u/s 54EC if the other requisite conditions of the Section are satisfied — Sudha S. Trivedi v ITO [ITA 6040 & 6186/Mum./2007].
5. The time-limit of 6 months for investment in Bonds is to be reckoned from date of receipt of part or full payments and not from date of transfer as defined u/s 53A of the Transfer of Property Act — [2012] 18 taxmann.com 304 Kolkata — Trib. Moreover, this period should be reckoned from the end of the month in which the transfer takes place — [2012] 17 taxmann.com 159 Mum.
6. Where purchase of specified conversion of investment into stocks or bonds just a few days beyond period of six months was under a bona fide mistake, the exemption can be denied but penalty u/s 271(1c) cannot be levied [2014] 45 taxmann.com 180 Punjab & Haryana.
7. Bona fide realignment of interest by way of effecting family arrangements among the family members does not amount to transfer — CIT v A L Ramanathan (2000) 245ITR494 (Mad).
Sec. 54 & 54F
The ITA provides other opportunities for saving tax on long-term capital gains such as by way of Sec. 54 & Sec. 54F. Sec. 54 gives exemption from tax on capital gains arising out of sale (or transfer) of a residential house, self-occupied or not, provided the assessee has purchased within 1 year before or 2 years after the date of sale or has constructed within 3 years after that date, one residential house in India. If only a part of the LTCG is used, the exemption would be pro-rata and the excess will be taxed.
The FA19 (interim) has extended the benefit to two houses provided the amount of the capital gain does not exceed ₹2 crore. This extended benefit will be available only once in a lifetime.
Two points are worthy of careful note —
1. For construction, there is no restriction on commencement date. It could have begun even more than 20 years before the sale.
2. The assessee need not apply the amount from the sale proceeds for purchasing another residential house. He can take a loan for the purchase or construction and use the sale proceeds for investment elsewhere if it is beneficial for him to do so.
Sec. 54F deals with capital gains arising out of assets other than residential houses. The stipulations are essentially the same but with 3 differences —
1. The assessee should not be an owner of more than one residential property on the date of transfer.
2. Sec. 54F requires reinvestment of the net consideration (sale value less expenses) whereas Sec. 54 is content with reinvestment of only the amount of capital gains.
3. In the case of Sec. 54, the assessee is required not to sell the new house within 3 years. If this condition is not satisfied, the cost of the new asset is to be reduced by the amount of long-term capital gains exempted from tax on the original asset and the difference between its sale price and such reduced cost will be chargeable as short-term capital gain earned during the year in which the new asset is sold.
Sec. 54F also requires the assessee not to sell the new house within 3 years. In addition, he is expected not to purchase within 1 year or construct within 3 years, another residential house. If any of these conditions are not satisfied, the capital gain originally exempted shall be treated as long-term capital gain of the year in which the house is sold, or another house is purchased or constructed.
This penalty is different from that of Sec. 54 and creates confusion. We do not comprehend the wisdom of imposing different punishments for the same offence.
In the case of Sec. 54, the recent FA19 has extended the concession to two houses in place of one where the amount of the capital gain does not exceed ₹2 crore. This concession is available once in a lifetime of the assessee.
Is ‘a’ = One?
Sec. 54 stated “. . . where, . . . the capital gains arises from the transfer of a long-term capital asset being . . . a residential house, and the assessee has . . . purchased a residential house, then . . . ”
There were a flood of litigations revolving around the meaning of ‘purchased a residential house’ and the judiciary pronouncements were contradictory and inconsistent with one another.
Additional flood arose because of faulty language used in the legislation which made it possible to claim the benefit even on a house purchased abroad.
FA14 has settled both the problems at one stroke by replacing the phrase ‘purchased a residential house’ with ‘purchased one residential house in India’.
However, 80C(xviii) dealing with deduction on repayment of capital amount of housing loan continues with — “for the purposes of purchase or construction of ‘a’ residential house property . . .”. This can cause problems in some cases.
SAN HelpThen again, if ‘a’ is ‘one’ it is also not ‘half’. Can an assessee purchase the new house jointly with his wife who has also contributed a share of the cost? ITO v Rasiklal N. Satra (280ITR243 dt 19.9.05) — Ownership of a residential house, means ownership to the exclusion of all others. Therefore, where a house is jointly owned by two or more persons, none of them can be said to be the owner of that house.
What if someone has sold two flats? Should he buy two flats or one? The query is answered by DCIT Central Circle-32 v Ranjit Vithaldas [2012] 23taxmann.com 226 ITAT Mumbai Bench ‘A’ — If two flats are sold even in different years and capital gains from both flats is invested in one residential house, exemption will be available for each flat sold provided the time-limit for construction or purchase of the new house is satisfied.
Capital Gains Accounts Scheme, 1988 (CGAS)
For ascertaining that the assessee really intends to purchase a new residential house within the stipulated time, all scheduled banks have a special bank account designated as CGAS. The amount deposited in such accounts before the last date of furnishing returns of income or actual date, if earlier, along with the amount already utilised, is deemed to be the amount utilised for the purpose.
This means that the assessee can utilise this amount for any purpose whatsoever during intervening period — ACIT v Smt Uma Budhia (2004) 141Taxman39 (Kol.).
If the amount is not utilised wholly or partly for the stipulated purpose, then, the amount of capital gains related with the unutilised portion of the deposit in CGAS shall be charged as the capital gains of the year in which the period expires.
Circular 743 dt 6.5.96 states that when the account holder expires, the unutilised amount in CGAS account is not taxable in the hands of the legal heirs or nominees as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.