“Finance Act 2023 redefines capital gains: Introduces amendments in Sec 54, 54F, and 45(5A), caps exemptions, and modifies MLD taxation. Embracing clarity and fairness in capital gain taxation.”
Article explains Amendment made by Finance Act, 2023 with regard to some provisions under the head Capital gain which incudes amendment in Section 54, Section 54F, Section 45(5A) New Section 5AA related to taxation of Market Linked Debenture.
Amendment in Section 54 and 54F of Income Tax Act, 1961
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Particulars |
Sec 54 | Sec 54F |
| 1.Eligibility | Available to Individual or HUF. | Available to Individual or HUF. |
| 2.Type of capital asset | Long term Capital asset | Long term Capital asset |
| 3. Nature of Asset | Any residential house being building or land appurtenant | Any LTCG other than residential house like gold, jewellery , shares etc. |
| 4.Purchase of New asset & amendment made by Finance Act, 2023 | New Residential house should be purchased.
Maximum Deduction allowed (w.e.f A.Y.2024-25) w.e.f 1st April , 2023 (i.e. A.Y. 2024-25) maximum deduction allowed under Sec 54 will be capped to Rs. 10 crore and consequently the cost of the new asset will be limited to Rs. 10 Crore. |
One New Residential house should be purchased.
Non availability/Withdrawal of exemption u/s 54F That exemption u/s 54F will not be available where, (i) the assessee already owns more than one residential house , other than the new asset on the date of transfer of Long term capital asset. (ii) assessee purchases additional residential house ,other than the new asset, within 1 year from the date of transfer of long term capital asset. (iii) assessee constructs additional residential houses, other than the new asset, within 3 years from the date of transfer of long term capital asset. Note: Under both the situations covered under (ii) / (iii, the exemption claimed earlier u/s 54F in respect of the cost of the new cost , shall now be taxable u/s 45 in the previous year in which such additional residential house is purchased/ constructed. (iv) Where the assesse sell/transfers the new asset within a period of 3 years from the date of purchase/construction of new asset then the exemption claimed earlier under 54F will now be chargeable under Sec 45 on the date of transfer of such new asset. Maximum Deduction allowed (w.e.f A.Y.2024- 25) w.e.f 1st April , 2023 (i.e. A.Y. 2024-25) maximum deduction allowed under Sec 54 will be capped to Rs. 10 crore and consequently the cost of the new asset will be limited to Rs. 10 Crore. |
| 5. Timeline for investment in New asset | For Purchase
1 year before the date of transfer or 2 year from the date of transfer of original asset For Construction 3 years from the date of transfer |
For Purchase
1 year before the date of transfer or 2 year after the date of transfer of original asset For Construction 3 years after the date of transfer Note: Here, Net sale consideration should be invested in New asset else proportionate exemption will be available. Case 1 Investment made < Net sale consideration then Proportionate exemption is allowed as follows: (Amount Invested * Capital Gain/Net sale consideration) Case 2 Investment made > net Sale consideration Whole Capital gain will be exempt |
| 6 .Cost of acquisition of New asset under two different situation | If the new asset purchased or constructed is sold within 3 years from the date of purchase or construction then two scenario will follow:
Scenario 1 Where Cost of new asset> Capital Gain E.g Capital Gain- 25 lacs Cost of New- 50 lacs Sale of New 80 Lacs In this case, Capital gain was fully exempt since cost of New asset> capital gain And COA of new asset will be reduced by the amount of exemption claimed. Capital Gain of New Sale price- 80 Less: COA- 25 55 COA- 50 (-) exemption Claimed- 25 25 Scenario 2 Where Cost of New< Capital Gain E.g Capital Gain- 35 lacs Cost of New- 30 lacs Sale of New 50 Lacs In this case, Capital gain was exempt to the extent of investment made i.e. Rs. 30 lac and 5 lac will be taxable u/s 45. COA of New asset And COA of new asset will be Nil . |
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| 7. Insertion of New provision for purchase of two residential house w.e.f 01.04.2020 | w.e.f 1st April, 2020 , proviso has been inserted that “ where the amount of capital gain does not exceed Rs. 2 crore ,then the assesse has the option to purchase or construct Two Residential houses”
Provided further that where during any assessment year, the assessee has exercised the option referred to in the first proviso, he shall not be subsequently entitled to exercise the option for the same or any other assessment year. |
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| 8. Investment in Capital Gain account Scheme | In case where the assesse has not invested toward the purchase of new asset within 1 year before the date of transfer or which is not utilized by him for the purchase or construction of the new asset before Filing ITR u/s 139(1) , then the assesse has the option to invest the same in Capital Gain account Scheme. Hence for the purpose of claiming exemption, the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset.
Provided that the amount deposited in CGAS account is not utilized toward the purchase or construction of new asset then the amount not so utilized shall be charged under sec 45 as the income of the previous year in which the period of 3 years from the date of transfer of original asset expires. Maximum Deduction allowed (w.e.f A.Y.2024-25) w.e.f 1st April , 2023 (i.e. A.Y. 2024-25) for the purpose of deposit in capital Gain Account Scheme, shall apply only to capital gain upto to Rs. 10 Crore. |
In case where the assesse has not invested toward the purchase of new asset within 1 year before the date of transfer or which is not utilized by him for the purchase or construction of the new asset before Filing ITR u/s 139(1) , then the assesse has the option to invest the same in Capital Gain account Scheme.
Hence for the purpose of claiming exemption, the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset. Provided that the amount deposited in CGAS account is not utilized toward the purchase or construction of new asset then the amount not so utilized shall be charged under sec 45 as the income of the previous year in which the period of 3 years from the date of transfer of original asset expires. Maximum Deduction allowed (w.e.f A.Y.2024- 25) w.e.f 1st April , 2023 (i.e. A.Y. 2024-25) for the purpose of deposit in capital Gain Account Scheme, shall be limited to Rs. 10 Crore |
INSERTION OF NEW SEC 50AA FOR TAXATION OF MARKET LINKED DEBENTURE
What is Market Linked Debenture
- Market Linked Debentures are non-Market Linked Debentures (MLDs) debentures wherein the returns are not fixed however they are linked to the market. The returns are determined on the performance of the underlying index. The underlying index could be equity benchmark, government yield, gold index etc.
- The advantage is that you are getting the exposure and upside in other markets such as equity (NSE Nifty) or G-sec, without taking as much of a risk as in investing directly into that asset.
- Market Linked Debentures are generally issued for a tenure ranging from 13 months to 60 months. Market Linked Debentures (MLDs) are debt instruments wherein the investors are generally sophisticated investors as this product is complex and has a high investment value.
- Unlike a bond that pays a fixed interest either monthly, quarterly, half yearly or annually, MLDs do not pay any regular income; the payment is made only at maturity.
- MLDs may be listed/unlisted or secured/unsecured. They are liquid instruments which are bought back by the issuers at times.
Existing Taxability of MLDs
Listed MLDs- Usually , most of the MLDs issued are listed in recognized Stock Exchange and as such enjoys two benefits i.e.
- For listed Security Sec 2(42A) of the Income Tax provides that the holding period to qualify the asset as long term capital asset is 12 months or more.
- Capital gain @ 10% will be charged on the listed security.
- Clause (ix) of Sec 193 of the Income Tax Act provides that no tax shall be deducted on any interest payable in respect of security listed in recognized Stock Exchange.
Unlisted MLDs- In the case of unlisted MLDs , taxation is same as for unlisted Debt securities. LTCG shall be taxed @ 20% with indexation for residents and 10% without indexation for Non-resident and the period of holding shall also become 36 months. If the period of holding is less than 36 months , it shall be taxed at slab rate.
Taxability after Introduction of New Sec 50AA of the Income Tax Act
W.e.f 1st April , 2023 “ any capital gain arising from the transfer or redemption or maturity of such MLDs shall be treated at short term capital asset irrespective of its period of holding and taxable at the Slab rate of the assesse.
Calculation of Short Term Capital Gain
| Full value of consideration received or accruing | xxxx |
| Less: Cost of acquisition of the Debenture | (xxx) |
| Less: Expenditure incurred in transfer | (xx) |
| Short Term Capital Gain | xxxx |
Omitted clause (ix) of Sec 193
Further the exemption available in respect of TDS deduction on interest income earned on listed debt securities including MLDs, has been discontinued with by omission of clause (ix) of proviso to section 193, and accordingly, TDS will now be deducted @ 10% on interest income earned on listed debt securities including MLDs, w.e.f. 1.4.2023.
Note:
This amendment made by Finance Act, 2023 will be applicable from 1st April, 2023, however the government has not come up with any Grandfathering provisions for all existing MLDs which is going to be redeemed on or after 1st April, 2023. This has created a burden on the assesse to sell all existing MLDs before 31st March, 2023 to take the benefit of existing provisions.
AMENDMENT IN SEC 45(5A) OF THE INCOME TAX ACT
Applicability- Individual or HUF
Type of Asset covered- Land or Building or both under specified Agreement
Scope of Provisions- Sec 45(5A) states that any capital gain accrues to the he individual or HUF from the transfer of any capital asset, being land or building or both under Joint development Agreement (a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash😉 shall be chargeable to tax u/s 45 in the previous year in which the certificate of completion for the whole or part of the project is issued by the Competent Authority.
For the purpose of computation of capital gain, sale Consideration shall be taken as follows:
Calculation of Consideration
| Stamp duty Value on the date of issue of said Certificate of assessee’s share | xxxxx |
| Add: Consideration received in cash , if any | xxxxx |
| Full Value of the consideration | xxxxxx |
Amendment made by Finance Act, 2023
That the full value of consideration for the purpose of Sec 45(5A) shall be taken as the stamp duty value of his share as increased by any consideration received in cash or by a cheque or draft or by any other mode.
Calculation of Consideration
| Stamp duty Value on the date of issue of said Certificate of assessee’s share | xxxxx |
| Add: Consideration received in cash , if any | xxxxx |
| Add: Consideration received by cheque, draft Or any other mode | xxxxx |
| Full Value of the consideration | xxxxxx |
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