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.
For instance, silver utensils¸ whether ancestral or purchased, and are used daily, are personal effects and as such gain arising from their sale will not be taxable. But if these are used only occasionally such as on Diwali, Puja etc., they will be capital assets, and the gains will be taxable as capital gains.
Unfortunately gold, held whether as stree-dhan or otherwise, is not treated as personal effect. Normal rules related with treatment of the transaction as STCG or LTCG are applicable. If such assets were purchased way back before 1.4.2001, the assessee has the right to replace the cost with the rate on that date which is @₹4,300 or the actual cost (if the records are available), whichever is higher.
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 all the returning NRIs will do well by bringing their cars with them and sell these in due course.
Capital Gains or Business Income
CBDT Circular 6/2016 dt. 29-2-16 has clarified that shares and other securities can be held either as capital assets or stock-in-trade/trading assets or both. Where the assessee, opts to hold these as stock-in-trade, the income arising from their transfer would be treated as business income. If the option of holding is capital asset, the income would be capital gain. This stand, once taken by the assessee shall remain applicable in all subsequent years.
Agricultural Land
Sec. 2(14iii) defines capital asset and Sec. 2(1A) defines agricultural income. An agricultural land is one which is not situated within a certain distance, measured aerially as the crow flies, from the local limits of any municipality, cantonment board, etc., having a certain amount of population according to the last preceding census. It 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.
Such an agricultural land is not a capital asset and therefore, it does not attract any capital gains on its transfer, either in normal course or under compulsory acquisition.
The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 provides that income tax shall not be levied on any award or agreement made under it. CBDT Circular 36 dt. 25-10-16 has declared that as this Act does not make any distinction between agricultural and non-agricultural land, the compensation received will be non-taxable, even for non-agricultural land.
Transactions not Regarded as Transfer
Following are some of the transactions related with NRIs which are not considered as transfer and therefore, are tax neutral. When the asset is eventually sold or transferred, the cost and period of holding shall be those for which the asset was held by the previous holder/s. 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.
1. Sec. 47(iii): Assets transferred under a gift or a Will or an irrevocable trust.
2. Sec. 47(vii): Mergers and amalgamations are not treated as transfer in the case of shares of companies, different schemes of MF as well as different options within the same scheme of MF.
3. Sec. 47(viia): Transfer of capital asset being bonds or GDR [referred to in section 115AC(1)] or Sec. 47(viiaa) rupee denominated bond of an Indian company issued outside India by one non-resident to another non-resident.
4. Sec. 47(viiab): Transfer of bonds or GDRs as referred to in Sec. 115AC(1) or Rupee Denominated Bond of Indian Co. or Derivative or any other specified security by a non-resident on a recognized stock exchange located in any IFSC and where the consideration is paid in foreign currency.
5. Sec. 47(viib): Gains arising from any transfer of a capital asset, being a government security carrying a periodic payment of interest, made outside Indian (through an intermediary dealing in settlement of securities) by a non-resident to another non-resident (Subject to certain conditions).
6. 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.
7. 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.
8. Sec. 47(x): Conversion of debentures, debenture stock, deposit certificates, preference shares of a company into its shares or debentures, and conversion of a company into its equity share..
9. Sec. 43AA: 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.
10. 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: Sec. 43
Any cash payments in capital expenditure above ₹10,000 shall not be considered to determine actual cost of asset. Moreover, no deductions shall be available u/s 35AD, including depreciation for such expenditure. It will be income chargeable to tax.
Rationalised and Simplified Capital Gains
FA24 has changed almost all the provisions related to the definition of capital gains as well as tax rates thereon rendering all the tax planning meticulously designed by any assessee over years becoming null and void. These changes are a little beneficial to some and a little non-beneficial to others. In any case, all the taxpayers, without any exception, are forced to go to their drawing board to redesign their future strategy even though this exercise may turn out to be futile because of instability of tax provisions.
Before we look at the amendments, please note that in the case of financial assets such as Bank FDs, Co-FDs, debentures, etc., where there is a pre-defined interest rate and no appreciation in the maturity value, the provisions of capital gains are not appliable. Hereunder is a list of these changes made effective immediately from 23-7-24.
1. Sec. 2(42A): Definition of STCG and LTCG: There will be only two holding periods. --- i) For all listed securities, the holding period is 12 months to qualify as LTCG. Thus, units of listed business trust will now be at par with listed equity shares at 1 year instead of earlier 36 months. The holding period below 1 year for these will be treated as STCG. ii) For all other assets, the holding period is 2 years to qualify as LTCG. Thus, the holding period for bonds, debentures, gold, etc., are reduced from 3 years to 2 years. For unlisted shares and immovable property, it shall remain at 2 years.
2. Sec. 111A: Tax Rate for STCG: On STT paid equity shares, units of equity-oriented MF and units of a business trust, the rate has been increased from 15% to 20%. Other STCGs shall continue to be taxed at the rates applicable to the assessee
3. Sec. 112A: Tax Rate for LTCG: This rate has been fixed at 12.5% for all assets. Earlier this rate was 10% for STT paid listed equity shares, units of equity-oriented fund and business trust u/s 112A and for other assets it was 20% with indexation u/s 112. For bonds and debentures, the LTCG rate was 20% without indexation.
4. Sec. 112A: Exemption: The limit up to which LTCG arising out of sale or transfer of listed securities are exempt, has been raised from ₹1 lakh to ₹1.25 lakh u/s 112A only on STT paid equity shares, units of equity-oriented fund and business trust.
5. Sec. 50AA:Unlisted debentures and unlisted bonds are of the nature of debt instruments and any capital gains thereon should be taxed at the rate applicable to the assessee whether STCG or LTCG.
6. Sec. 48: Simultaneously with rationalisation of rate to 12.5%, indexation has
been removed for calculation of any LTCG which was available for property, gold
and other unlisted assets. Yes, indexation was planned to become history, but it
was realised that some of the taxpayers, under certain situations, may face excess
tax liability. Before the Bill was passed by the Parliament, it was modified to
provide for an option only to Resident Individuals and HUFs (not for any other entity
including NRIs) and only on transfer of land or building or both, acquired before
23-7-24. The tax payable on LTCG would be lower of a) 12.5% of capital gains without
indexation; and b)20% of capital gains with indexation. This relief is only for
capping of LTCG tax liability to 20% with indexation. In other words, any ‘specified
taxpayer’ can compute the tax liability @20% with indexation and @12.5% without
indexation and choose the one that is beneficial. For all other purposes like aggregation,
set-off, carry forward and roll over exemption, the LTCG needs to be computed without
indexation benefit. This means that if there are losses, a larger quantity of loss
can be carried forward since such losses can be computed without indexation. Unfortunately,
this indexation benefit (only for real estate) is not available to NRIs. It is available
to RNORs.
Grandfathering u/s 112A
Prior to FA18, LTCG arising from shares was exempt. To bring such gains into the tax net, only prospectively, and to ensure that the tax is levied only on the gains after 1-2-18, grandfathering of Sec. 112A was introduced by FA18. For this, the cost of acquisition of the equity or equity-related securities is to be calculated based on a formula that modified the purchase cost as if the shares were purchased on 1-2-18. Accordingly ---
A = Fair Market Value as of 31-1-18 or the Actual Selling Price, whichever is lower.
B = A or Actual Purchase Price, whichever is higher. This is the cost of acquisition.
LTCG = Sale value - B.
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
Thankfully, the recent FA24 has retained this grandfathering clause.
Summary
1. The holding period for STCG is 12 months for listed securities and 24 months for all other assets, including unlisted securities. Gains over these periods are LTCG.
2. Tax rate on listed securities:
STCG: Old rate -- 15%. New rate --20.0%.
LTCG: Old rate -- 10%. New rate --12.5% or
20.0% with Index.
Simultaneously, exemption on the amount of related LTCG has been increased from ₹1.00 lakh to ₹1.25 lakh.
3. Tax rate on other assets like bonds debentures, gold, unlisted securities, immovable property, etc:
STCG: Old rate: -- Normal. NewRate -- Normal.
LTCG: Old rate: -- 20% with Index. New Rate -- 12.5% or -> -> -> 20% with index
4. MF schemes are treated as mentioned above, except for debt-based schemes (less than 35% exposure to equity), purchased before 1-4-23, the holding period is 2 years to qualify as long-term. In that case, the tax rate is 12.5% for long-term. It is slab rate in all other cases, LTCG or STCG.
Strategy
We appreciate the FM Nirmala Sitharaman for this bold step. In one fell swoop she
has dissuaded investors in the share market from short-term transactions, particularly
day-trading, which is akin to gambling. Long-term investors in the share market
have nothing to worry about. All that they should do is to sell shares in their
portfolio with a holding period of over one year and earn capital gain of up to
₹1.25 lakh which is exempt and therefore, no tax is payable thereon. In case you
have difficulty in picking up such a saleable a scrip, you may sell and buy the
same scrip at the same price. Difficulty solved.
LTCG on OFS (Offer for Sale)
At present, one of the mandatory conditions for claiming the benefit of LTCG on equity share or a unit of an equity-oriented MF or a unit of a business trust is that STT is paid at the time of acquisition and transfer. Thereafter, Central Government notified cases of acquisitions to be given the benefit in cases where STT could not have been paid at acquisition since these got listed after the amendment.
For clarity, Sec. 55 has been amended by the recent FA24 to specifically provide that in a case where the capital asset is an equity share in a company which is not listed as on 31-3-18, or which became the property of the assesses in consideration of share which is not listed on exchange as on 31-3-18 by way of transaction not regarded as transfer u/s 47, but listed on such exchange subsequent to the date of transfer, ‘fair market value’ would mean an amount which bears to the cost of acquisition the same proportion as CII for FY18 bears to the CII for the first year in which the asset was held by the assessee or for FY beginning on 1-4-01, whichever is later. This provision will come into effect w.r.e.f. 1-4-18.
Gifts and Capital Gains
U/s 47(iii), assets transferred under a gift or a Will or an irrevocable trust are not treated as transfer. For computing LTCG arising out of subsequent sale by the donee or 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.
LTCG on Buy-back
This matter is discussed in detail in Chapter ‘Income Tax’
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. 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 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.
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.
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.
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. 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.
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.
Sale Value less than Stamp Duty Value — 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 this 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.
If the assessee claims that this deemed value exceeds the fair market value (FMV) the ITO may ask a valuation officer of the Department to assess the FMV and revise the deemed value, if necessary.
This results in the buyer paying higher stamp duty and the seller paying higher tax on capital gains. Unfortunately, when the buyer sells the property later, he is forced to adopt the original value declared by him and not the stamp duty valuation.
Capital Gain on Housing Development
Sec. 45(5A) provides for the capital gain arising to an individual or HUF, from the transfer of land or building or both, under a Joint Development agreement to be chargeable to tax as income of the year in which the certificate of completion for the whole or part of the project is issued by the competent authority. Further, for computing the capital gains, the full value of consideration shall be taken as the stamp duty value of his share, as increased by the consideration received in cash or by a cheque or draft or by any other mode.
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.
Sec. 54EC Bonds
Bonds issued by National Highway Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC), and Indian Railways Finance Corporation (IRFC), and some other notified institutions are under the umbrella of Sec. 54EC. These offer exemption on LTCG gained during the FY up to the amount of gains invested within 6 months. There is a limit on contributions to these Bonds of ₹50 lakh per FY. Before buying, ensure that the company has not temporarily closed its widow for issuing such Bonds.
These Bonds are redeemable after 5 years. The Bonds can be purchased during the FY when the CG occurs and the subsequent FY but within the stipulated period of 6 months. Yes, the limit is ₹50 lakh/FY and the contribution has to be made within 6 months, but you cannot contribute ₹50 lakh in this FY and another ₹50 lakh in the next FY (within 6 months) and claim the benefit against LTCG earned during this year.
Earlier all types of LTCG could have been saved by investing in these Bonds. However, FA18 has restricted the shelter of these Bonds only for 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, stock-in-trade, etc
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.
Analysis
Deposits in these 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 two opportunities for saving tax to an individual or HUF on LTCG arising out of transfer of a residential house, self-occupied or not, and or land appurtenant thereto. One of them is Sec. 54. The other one is Sec. 54EC, which we shall cover a little later. Exemption u/s 54 can be claimed provided the assessee has purchased within 1 year before or 2 years after the date of transfer 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 charged to tax. Sec. 54F deals with LTCG arising out of assets, other than residential houses.
In the current scenario, this requirement of construction being completed within 3 years has become unrealistic. Recognising this fact, FA16 amended Sec. 24 raised the requirement of the construction being completed within 3 years to 5 years, only for the exemption on interest payable on housing finance. Corresponding amendments have not been inserted for Sec. 54 and Sec. 54F. Hopefully, the corrective action will be taken in near future
For preventing huge deductions by HNI assessees by purchasing very expensive residential houses, there is a limit on the maximum deduction that can be claimed by an assessee u/s 54 and 54F at ₹10 crore. If the cost of the new asset purchased is more than ₹10 crore, it shall be deemed to be ₹10 crore.
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 three 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.
Sell Two, Buy One
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.