Explore the amendments in Capital Gain exemptions under Section 54 & 54F in the Budget 2023, aiming to limit exemptions for high net worth individuals.
Income under the head capital gains is chargeable if there is a transfer of a capital asset during the previous year. If the capital gains are invested under the specified modes as per the relevant provisions of the act, the amount of gains is exempted.
Section under 54 series talk about the exemption under the head capital gains. The most common sections under exemption are section 54,54EC and 54F. These are seen most commonly in majority of the returns.
Let us first see what are these sections –
Section 54 – Exemption from capital gain on sale of residential house property (Long term) and purchase or construction of residential house property.
Section 54EC – Exemption from capital gain on sale of immovable property (Long term) and investing in the notified bonds
Section 54F – Exemption from capital gains on sale of asset other than residential house property (Long term) and purchase or construction of residential house property.
The finance bill, 2023 aims to amend the sections 54 and 54 F, that talks about investing in the residential house property. These sections were originally introduced in order to mitigate the acute shortage of housing. However, it has been observed by the department that the high net worth assessees are purchasing expensive houses and taking huge exemptions, thus, defeating the main purpose of these sections.
So, amendments are proposed to limit the exemptions allowed under this sections –
POSITION BEFORE AMENDMENT
Section 54 – The assessee being individual or HUF, if transfers a residential house property (LTCA) and invests the capital gains in a new residential house the amount of gain or amount invested, whichever is lower, shall be exempted. The assessee shall either purchase the house within 1 year before or 2 years after the date of transfer or construct within 3 years of transfer. If gain does not exceed 2 crore investment can be made in 2 houses.
For eg. – If gain amount is 8 crore and the assessee purchases a new house of 8 crore, the whole amount of gain shall be exempted.
Section 54F – The assessee being individual or HUF, if transfers a capital asset other than residential house property (LTCA) and invests the net sales consideration in a new residential house, the amount of gain shall be exempted if the whole consideration is invested. If however, the full consideration is not invested, the proportionate gains shall be exempt. The assessee shall either purchase the house within 1 year before or 2 years after the date of transfer or construct within 3 years of transfer.
For eg – If sale consideration is 20 cr, gain is 5 crore and the amount invested is
a) 25 crore – Full amount of gain shall be exempted.
b) 15 crore – Proportionate gain shall be exempted – i.e. – 5cr * 15/20 = 3.75 cr.
POSITION AFTER AMENDMENT
The amendment aims to restrict the exemption under these sections up to Rs. 10 crore. So, even if the amount invested is more than 10 cr., the maximum amount of exemption that can be claimed will be restricted to 10 cr.
Sec 54 – The maximum deduction that can be claimed will be restricted to 10 cr. If the cost of new asset purchased is more than 10cr. cost will be deemed to be 10 cr.
For eg. – If gain amount is 18 crore and the assessee purchases a new house of 18 crore, the amount of exemption will be 10cr.
Sec 54F – The maximum amount of deduction will be 10 cr. So, the investment over that will be ignored. A proviso is inserted to provide that the amount of net consideration in excess of Rs. 10 cr. will not be taken into account for the purposes of computing exemption under this section.
For. Eg – The consideration of a plot – 15cr. Capital Gain – 8 cr. Amount invested in new residential house – 12 cr. The amount of gain exempt –
= 8*10/15 = 5.33 cr will be exempt. Amount taxable – 8-5.33 cr = 2.67 cr
Corresponding amendments are made in section 54 and 54F in the provisions related to CGAS to restrict the amount of exemption to 10cr.
The above changes are made in the provisions related to exemption under the head capital gains.