Chapter IV-E of the Income Tax Act, 1961, deals with the taxation of capital gains arising from the transfer of immovable property held as a capital asset. This chapter outlines the rules, rates, and exemptions related to capital gains, making it a crucial section for taxpayers to understand. In this analysis, we will explore the key aspects of Chapter IV-E, including short-term and long-term capital gains, tax computations, exemptions, and deductions, as well as the tax obligations of the seller.
APPLICABLE CHAPTER IN THE INCOME TAX ACT, 1961:
The applicable Provisions are in the Chapter IV-E Capital Gains:
- Profits or gains arising from the transfer of an immovable property, held as a capital asset, are taxed under the head “Capital Gains”.
- Capital Gains—taxable in the hands of the Seller
- The incidence of tax on Capital Gains depends upon the period for which the capital asset under consideration was held before the transfer.
- An immovable property, being land or building or both, held for a period of 24 months or less qualifies as a ‘short-term capital asset ‘and if such capital asset is held for more than 24 months it qualifies as a ‘long-term capital asset’. For assessment years prior to A.Y. 2018-19, such period was 36 months instead of 24 months.
SHORT-TERM AND LONG-TERM CAPITAL GAINS:
Transfer of a short-term capital asset gives rise to Short Term Capital Gains (“STCG”) and transfer of a long-term capital asset gives rise to Long Term Capital Gains (“LTCG”). The tax rates for STCG and LTCG are different.
ILLUSTRATIONS
STCG arising on account of transfer of short-term capital asset in the hands of seller will be computed as follows:
| Particulars | Amount | |
| A | Full value of consideration (i.e., Sales consideration of asset) [for example take Z 50,00,000] | 50,00,000/- |
| B | Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (e.g., brokerage, commission, advertisement expenses, etc.)[for example take Z 1,00,000] | 1,00,000/- |
| C | Net sale consideration[(A)-(B)] | 49,00,000/- |
| D | Less: Cost of acquisition [for example take Z 20,00,000] | 20,00,000/- |
| E | Less: Cost of improvement, if any [for example take Z 50,000] | 50,000/- |
| F | Short-Term Capital Gains [(C)-(D)-(E)] |
28,50,000/- |
Rate of Taxation for STCG: The STCG computed as above forms part of the total income and is chargeable to tax as per the normal rate of tax as applicable to the assessee.
LTCG arising on account of transfer of long-term capital asset in the hands of seller will be computed as follows:
| Particulars | Amount | |
| A | Full value of consideration (i.e., Sales consideration of asset) [for example assume that properties sold in the F.Y. 2017-18 for Z 50,00,000] | 50,00,000/- |
| B | Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (e.g., brokerage, commission, advertisement expenses, etc.) [for example take Z 1,00,000] | 1,00,000/- |
| C | Net sale consideration[(A)-(B)] | 49,00,000/- |
| D | Less: Indexed cost of acquisition (*) [for example assume that property was purchased in the F.Y. 2012-13 for Z 30,00,000] | 42,00,000P |
| E | Less: Indexed cost of improvement if any (*) [for example assume that cost of improvement in the F.Y. 2014-15 was of Z 3,60,000] | 4,20,000P |
(*) Indexation is a process by which the cost of acquisition is adjusted against inflationary rise in the value of asset. For this purpose, CBDT has notified cost inflation index. The benefit of indexation is available only to long-term capital assets. For computation of indexed cost of acquisition following factors are to be considered:
YEAR OF ACQUISITION/IMPROVEMENT:
- Year of transfer,
- Cost inflation index of the year of acquisition/ improvement,
- Cost inflation index of the year of transfer
*Indexed cost of acquisition is computed with the help of following formula:
Cost of acquisition x Cost inflation index of the year of transfer of capital asset/Cost inflation index of the year of acquisition
*Indexed cost of improvement is computed with following formula:
Cost of improvement x Cost inflation index of transfer of capital asset/Cost inflation index of improvement
The Central Government has notified the following Cost Inflation Index numbers:
| Financial Year | Cost Inflation Index |
| 2001-02 | 100 |
| 2002-03 | 105 |
| 2003-04 | 109 |
| 2004-05 | 113 |
| 2005-06 | 117 |
| 2006-07 | 122 |
| 2007-08 | 129 |
| 2008-09 | 137 |
| 2009-10 | 148 |
| 2010-011 | 167 |
| 2011-12 | 184 |
| 2012-13 | 2002 |
| 2013-14 | 220 |
| 2014-15 | 240 |
| 2015-16 | 254 |
| 2016-17 | 264 |
| 2017-18 | 272 |
| 2018-19 | 280 |
| 2019-20 | 289 |
| 2020-2021 | 301 |
| 2021-2022 | 317 |
RATE OF TAXATION FOR LTCG:
The LTCG computed as above is chargeable to tax at a special rate of tax, i.e. 20% (plus surcharge and cess as applicable). Further, no deduction under Chapter VIA is allowed against the LTCG.
- Where the actual sale consideration receivable for the transfer of a capital asset, being land or building or both, is less than the value adopted or assessable by Stamp Valuation Authority for the purpose of stamp duty in respect of such transfer, the value adopted by such authority would be taken as the full value of consideration in computing the Capital Gains as per provisions of section 50C of the Income-tax Act.
- In other words, while computing Capital Gains: Full value of consideration = (Actual Sales consideration) or (Valuation adopted for Stamp Duty payment), whichever is higher.
- In this regard, some relief has been provided vide the Finance Act, 2018, whereby the effect of the above deeming provision would not apply if the difference between actual sales consideration and stamp duty valuation of such property is not more than 5% of the actual sale consideration.
- Where the amount of actual purchase consideration payable by a Buyer for purchase of immovable property is less than the Stamp Duty Value of such property, the difference between the Stamp Duty Value and purchase consideration shall be taxable in the hands of the Buyer under the head “Income from Other Sources” at the normal rate of tax applicable to such assessee as provided under section 56(2) (x) of the Act.
- The above provision will not apply if the above referred amount of difference does not exceed 50,000. Further, some relief has been provided vide the Finance Act, 2018, whereby the effect of the above provision would not apply if the difference between Stamp Duty Value and actual purchase consideration is not more than 5% of the actual purchase consideration.
EXEMPTIONS AND DEDUCTIONS:
LTCG is exempt from tax if the seller invests the amount of such capital gain in specified types of assets. The key exemptions in this regard have been summarised below:
|
Section |
54 | 54EC I |
| Exemption to | Individual or HUF Only | Any assessee |
| Sale of | LTCA being residential house/ land appurtenant thereto | LTCA being land/ building or both |
| Investment made in Purchase of | Amount of Capital Gains invested in — A new Residential House (only 1) in India. | Amount of Capital Gains invested in —
Specified Bonds of NHAI or RECL (These bonds m will now have maturity of 5 years or more) |
| Time Period of Purchase | If Purchased, within One year before or 2 years after; If Constructed, within 3 years after the transfer. (refer Note below) | Within 6 months of the ml transfer |
| Consequen- ces if new asset is sold within a particular period. | If new asset sold within 3 years, while calculating Capital Gains for the new asset, Capital Gain exempt earlier will be reduced from its Cost of Acquisition | On sale of securities or otherwise conversion into money within 5 years, LTCA exempted earlier will be taxable in the year of such sale or conversion. |
–
|
Section |
54GB | 54F |
| Exemption to | Individual or HUF Only | Individual or HUF Only |
| Sale of | LTCA being Residential Property | Any LTCA except residential house |
| Investment made in Purchase of | Amount of Sale consideration invested in – Purchase of Equity Shares of an Eligible Company in which the assessee holds 50% or more shares/ voting power, and the Eligible Company makes investment in new plant and machinery as prescribed | Amount of Sale consideration invested in –
A New Residential House (only 1) in India |
| Time Period of Purchase | Before the due date of
ITR (refer Note below) |
If Purchased, within One year ii before or 2 years after; If Constructed, within 3 years after the transfer (refer Notel below) |
| Consequence s if new asset is sold within a particular period. | If new asset (shares or plant and machinery) sold within 5 years, then amount of LTCG exempted earlier will be taxable in the year of such sale in the hands of respective assessee | If new asset sold within 3 years, then amount of LTCG exempted earlier will be taxable in the year of such sale |
Note:
- If investment in new asset is not made before the due date of filing tax return for the year in which LTCG is taxable, such amount of investment shall be deposited in a specified bank/institution under Capital Gains Account Scheme before such due date.
- Amount of deduction claimed under section 80C to be taxable if residential house sold within 5 years,
- Where loan was taken for purchase of residential house property and deductions were claimed for the principal repayment, stamp duty and registration under section 80C of the Act and thereafter, if such house property is sold within five years from the end of the financial year in which the possession of such property was obtained, the tax benefits which were claimed earlier will have to be reversed. The tax deduction claimed for the principal repayment, stamp duty and registration under section 80C becomes taxable in the year of such sale.
RESIDENT STATUS OF SELLER:
If Seller is a “Resident” in India:
1. In case the total amount of purchase consideration payable for such immovable property is more than 50 lakhs, the Buyer is required to deduct tax at the rate of 1% of the purchase consideration payable to the resident seller.
2. Such TDS is required to be done at the time of payment or credit to the account of the Seller, whichever is earlier.
3. The Buyer is required to deduct tax at the rate of 20% in case the seller does not provide his PAN to the buyer.
4. The tax so deducted has to be deposited by the Buyer with the Government authorities within 30 days from the end of the month in which TDS was deducted along with Form 26QB.
5. The Buyer is also required to furnish a TDS certificate as per Form 16B to the Seller within fifteen days from the due date for furnishing Form No. 26QB after generating and downloading the same from the web portal specified by the Income-tax Department.
6. The Seller can claim credit of such TDS in his Income-tax Return.
7. The Seller can claim a refund of the TDS in his income-tax return if he is incurring a loss on the sale of the property or if he is claiming exemption from long-term capital gains under any of the ways discussed earlier.
If Seller is a “Non-Resident” in India:
1. If the immovable property is being purchased from a person who is a Non-Resident in India as per the provisions of the Income-tax Act, the Buyer is obligated to deduct tax @ 20% if the asset is a long-term capital asset and @ 30% if the asset is a short-term capital asset (plus surcharge and cess as applicable). (Sec. 195)
2. Such TDS is required to be done at the time of payment or credit to the account of the Seller, whichever is earlier.
3. The tax so deducted has to be deposited by the Buyer with the Government authorities within 7 days from the end of the month in which TDS was deducted.
4. The Buyer will also need to have a Tax Deduction Account Number (“TAN” ).
5. The Buyer is also required to furnish the applicable Quarterly TDS Statement in Form 27Q in the prescribed manner. The due dates for filing such quarterly TDS statements have been summarised below:
| Date ending on | Due date for filing TDS Statement in Form 27Q |
| 30th June | 31st July of the Financial Year |
| 30th September | 31st October of the Financial Year |
| 31st December | 31st January of the Financial Year |
| 31st March | 31st May of the Financial Year |
PART-PERFORMANCE OF CONTRACT CASES:
The capita gain arising on a/c of any transaction involving of any immovable property to be taken performance of a contract of the nature 53A of the Transfer of Property Act, 1882 the year in which such transaction was transfer of immovable property was not want of registration under the general the part performance is “Transfer” for {Sec.2(47) (v) of the IT Act r.w.s. 53A of the Transfer of Property Act. 1882 would be taxable in the year in which such transaction was entered into, even if the transfer of immovable property was not effective or complete for want of registration under the general law. Therefore, even the part performance ‘Transfer’ for attracting capital gain {Sec.2(47) (V) of the IT Act r.w.s. 53A of Transfer of property Act, 1882}. Thus, event the exe cution of Joint Development Agreement between may also give rise to capital gain tax liability in the hands of the owner.
(Republished with amendments)
