Budget 2023: Limiting the roll over benefit claimed under section 54 and section 54F
The existing provisions of section 54 and section 54F of the Income-tax, 1961 (the Act) allows deduction on the Capital gains arising from the transfer of long-term capital asset if an assessee, within a period of one year before or two years after the date on which the transfer took place purchased any residential property in India, or within a period of three years after that date constructed any residential property in India. For section 54 of the Act, the deduction is available on the long-term capital gain arising from transfer of a residential house if the capital gain is reinvested in a residential house. In section 54F of the Act, the deduction is available on the long term capital gain arising from transfer of any long term capital asset except a residential house, if the net consideration is reinvested in a residential house.
2. The primary objective of the sections 54 and section 54F of the Act was to mitigate the acute shortage of housing, and to give impetus to house building activity. However, it has been observed that claims of huge deductions by high-net-worth assessees are being made under these provisions, by purchasing very expensive residential houses. It is defeating the very purpose of these sections.
3. In order to prevent this, it is proposed to impose a limit on the maximum deduction that can be claimed by the assessee under section 54 and 54F to rupees ten crore. It has been provided that if the cost of the new asset purchased is more than rupees ten crore, the cost of such asset shall be deemed to be ten crores. This will limit the deduction under the two sections to ten crore rupees.
4. Consequentially, the provisions of sub-section (2) of section 54 and sub-section (4) of section 54F that deals with the deposit in the Capital Gains Account Scheme have also been amended. It is proposed to insert a proviso to provide that the provisions of subsection (2) of section 54 and sub-section (4) of section 54F, for the purpose of deposit in the Capital Gains Account Scheme, shall apply only to capital gains or net consideration, as the case may be, upto rupees 10 Crores.
5. These amendments will take effect from the 1st day of April, 2024 and shall accordingly, apply in relation to the assessment year 2024-25 and subsequent assessment years.
[Clauses 25 & 30]
Extract of relevant clause of Finance Bill 2023
Clause 25 of the Bill seeks to amend section 54 of the Income-tax Act relating to profit on sale of property used for residence.
Sub-section (1) of the said section, inter alia, allows deduction on the capital gains arising from the transfer of long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, if an assessee, within a period of one year before or two years after the date on which the transfer took place, purchased one residential property in India, or within a period of three years after that date, constructed one residential property in India.
It is proposed to insert a third proviso to the said sub-section so as to provide that where the cost of new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of that sub-section.
It is further proposed to insert a proviso to provide that the amount of capital gain in excess of rupees ten crores will not be taken into account for the purposes of sub-section (2).
These amendments will take effect from 1st April, 2024 and shall accordingly, apply in relation to the assessment year 2024-2025 and subsequent assessment years.
Clause 30 of the Bill seeks to amend section 54F of the Income-tax Act relating to capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.
Sub-section (1) of the said section, inter alia, allows deduction on the capital gains arising from the transfer of long-term capital asset, not being a residential house, if an assessee, within a period of one year before or two years after the date on which the transfer took place purchased one residential property in India, or within a period of three years after that date constructed one residential property in India.
It is proposed to insert a second proviso to the said sub-section so as to provide that where the cost of new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of that sub-section.
It is further proposed to insert a proviso to provide that the amount of net consideration in excess of rupees ten crores will not be taken into account for the purposes of sub-section (4).
These amendments will take effect from 1st April, 2024 and shall accordingly, apply in relation to the assessment year 2024-2025 and subsequent assessment years.
Extract of Relevant Amendment Proposed by Finance Bill, 2023
25. Amendment of section 54.
In section 54 of the Income-tax Act, with effect from the 1st day of April, 2024,––
(a) in sub-section (1), after the second proviso, the following proviso shall be inserted, namely:––
“Provided also that where the cost of new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of this sub-section.”;
(b) in sub-section (2),––
(i) after the words “amount so deposited shall”, the words, brackets and figure “, subject to the third proviso to sub-section (1)” shall be inserted;
(ii) after the proviso, the following proviso shall be inserted, namely:––
“Provided further that the capital gains in excess of ten crore rupees shall not be taken into account for the purposes of this sub-section.”.
30. Amendment of section 54F.
In section 54F of the Income-tax Act, with effect from the 1st day of April, 2024,–
(a) in sub-section (1), after the proviso and before the Explanation, the following proviso shall be inserted, namely:–
“Provided further that where the cost of new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of this sub-section.”;
(b) in sub-section (4),–
(i) after the words “amount so deposited shall”, the words, brackets and figure “, subject to the second proviso to sub-section (1)” shall be inserted;
(ii) after the proviso, the following proviso shall be inserted, namely:–
“Provided further that the net consideration in excess of ten crore rupees shall not be taken into account for the purposes of this sub-section.”.
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