Know Your Taxes – Capital Gains Taxation PART 2

Tax Planning Calculator

We had covered most of the basics of capital gains taxation in the previous series which gives us a good foundation to discuss about exemptions in this blog.

Exemptions from capital gains

There are various exemptions from capital gains under certain circumstances. However, I have primarily focused on the important ones as given below:

A. Capital gains on sale or transfer of residential house (section 54)

Eligible assessees: Individual & Hindu Undivided Family

Conditions to be fulfilled:

  1. There should be a transfer of residential house (buildings or land appurtenant thereto)
  2. It must be a long-term capital asset
  3. Income from such house should be chargeable under the head “Income from House Property”
  4. One* residential house in India should be:
    1. Purchased within 1 year before or 2 years after the date of transfer; or
    2. Constructed within a period of 3 years after the date of transfer

*With effect from assessment year 2015-16, exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India.

Quantum of exemption:

  • If cost of new residential house >= capital gains, entire capital gains is exempt
  • If cost of new residential house < capital gains, capital gains to the extent of cost of new residential house is exempt

Examples:

  • Example 1- If the capital gains is ₹5 lakhs and the cost of the new house is ₹7 lakhs, then the entire capital gains of ₹5 lakhs is exempt
  • Example 2- If the capital gains is ₹5 lakhs and the cost of the new house is ₹3 lakhs, then capital gains is exempt only upto ₹3 lakhs. Balance ₹2 lakhs is taxable at the rate of 20%

Consequences of transfer of new asset before 3 years

Exemption under section 54 is available in respect of rollover of capital gains arising on transfer of residential house into another residential house. However, to keep a check on misutilization of this benefit, a restriction is inserted in section 54. The restriction is in the form of prohibition of sale of the new house.

  • If the new asset is transferred before 3 years from the date of its acquisition/ purchase, then cost of the asset will be reduced by capital gains exempted earlier for computing short-term capital gains.
  • Continuing example 1, if the new house was sold after 2 years for ₹8 lakhs, then short term capital gains chargeable to tax would be:

ParticularsAmount in ₹Amount in ₹
Net consideration800,000
Less: cost of acquisition700,000
Less: capital gains exempt earlier500,000200,000
Short term capital gains chargeable to tax600,000

Example:

Mr. Shivank purchased a residential house on July 20, 2012 for ₹10,00,000 and made some additions to the house incurring ₹200,000in August 2012. He sold the house property in April 2015 for ₹20,00,000. Out of the sale proceeds, he spent ₹500,000 to purchase another house property in September 2015.

Must Read  Taxability of Gifts

Financial YearCost Inflation Index
2012-13852
2015-161081

B. Capital Gains on transfer of agricultural land (Section 54B)

Eligible assessee – Individual & Hindu Undivided Family

Conditions to be fulfilled

  • There should be a transfer of urban agricultural land.
  • Such land must have been used for agricultural purposes by the assessee, being an individual or his parent, or by any member of the Hindu Undivided Family in the immediately two preceding years
  • He should purchase another agricultural land (urban or rural) within 2 years from the date of transfer.

In case of compulsory acquisition the period of acquisition of new agricultural land will be determined from the date of receipt of compensation. However, as per section 10(37), no capital gain would be chargeable to tax in case of an individual or HUF if agricultural land is compulsorily acquired under any law and the consideration of which is approved by the Central Government or RBI and received on or after 01-04-2004.

Quantum of exemption

  • If cost of new agricultural land ≥ Capital gains (short-term or long-term), entire capital gains is exempt.
  • If cost of new agricultural land < Capital gains (short-term or long-term), capital gains to the extent of cost of new agricultural land is exempt.

Examples

  • Example 1 – If the capital gains is ₹ 3 lakhs and the cost of the new agricultural land is ₹ 4 lakhs, then the entire capital gains of ₹ 3 lakhs is exempt.
  • Example 2 – If capital gains is ₹ 3 lakhs and cost of new agricultural land is ₹ 2 lakhs, then capital gains is exempt only upto ₹ 2 lakhs

Consequences of transfer of new agricultural land before 3 years

  • If the new agricultural land is transferred before 3 years from the date of its acquisition/ purchase, then cost of the land will be reduced by capital gains exempted earlier for computing short-term capital gains.
  • However, if the new agricultural land is a rural agricultural land, there would be no capital gains on transfer of such land.

Continuing Example 1, if the new agricultural land (urban land) is sold after, say, 2 years for ₹ 6 lakhs, then short term capital gain chargeable to tax would be –

ParticularsAmount in ₹Amount in ₹
Net consideration600,000
Less: Cost of new agricultural land
Cost of acquisition400,000
Less: capital gains exempt earlier300,000
100,000
Short-term capital gains chargeable to tax500,000

C. Capital gains in cases of investment in residential house [Section 54F]

Eligible assessees: Individuals and Hindu Undivided Family

Conditions to be fulfilled:

1.There must be transfer of a long-term capital asset, not being a residential house.

2.Transfer of plot of land is also eligible for exemption

3.The assessee should –

  • Purchase one residential house situated in India within a period of 1 year before or 2 years after the date of transfer; or
  • Construct one residential house in India within 3 years from the date of transfer.

4. The assessee should not own more than one residential house on the date of transfer.

Must Read  Analysis of Income from House Property (Part 3)

5. The assessee should not –

  • purchase any other residential house within a period of one year or
  • construct any other residential house within a period of 3 years

from the date of transfer of the original asset

Quantum of exemption

  • If cost of new residential house ≥ Net sale consideration of original asset, entire capital gains is exempt
  • If cost of new residential house < Net sale consideration of original asset, only proportionate capital gains is exempt i.e.

LTCG x  Amount invested in new residential house /  Net sale consideration 

Example

From the following particulars, compute the taxable capital gains of Mr. Atul for A.Y.2016-17 :

ParticularsAmount in ₹
Cost of jewellery [Purchased in F.Y.1990-91]182,000
Sale price of jewellery sold in January 201611,50,000
Expenses on transfer7,000
Residential house purchased in March 2016500,000

Computation of taxable capital gains for A.Y.2016-17 :

ParticularsAmount in ₹
Gross consideration11,50,000
Less: Expenses on transfer7,000
Net consideration11,43,000
Less: Indexed cost of acquisition (182,000 x 1081/182)10,81,000
62,000
Less: Exemption under section 54F
(62,000 x 500,000/11,43,000)
27,122
Taxable capital gains34,878

Consequences if the new house is transferred within a period of 3 years

  • Short-term capital gains would arise on transfer of the new house; and
  • The capital gains exempt earlier under section 54F would be taxable as long-term capital gains.

In the given illustration, if the new residential house is sold for ₹6,00,000 after say, 1 year, then ₹1,00,000 [i.e. ₹6,00,000 (-) ₹5,00,000] would be chargeable as short-term capital gain of that year in which the new house is sold.

₹34,878, being the capital gains exempt earlier, would be taxable as long-term capital gains of that year in which the new house is sold.

D. Capital Gains not chargeable on investment in certain bonds [Section 54EC]

Eligible assessee – Any assessee

Conditions to be fulfilled

  • There should be transfer of a long-term capital asset.
  • Such asset can also be a depreciable asset held for more than 36 months.
  • The capital gains arising from such transfer should be invested in a long-term specified asset within 6 months from the date of transfer.
  • Long-term specified asset means specified bonds, redeemable after 3 years, issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation Limited (RECL).
  • The assessee should not transfer or convert or avail loan or advance on the security of such bonds for a period of 3 years from the date of acquisition of such bonds.

Other points

  • In case of conversion of capital asset into stock in trade and subsequent sale of stock in trade – period of 6 months to be reckoned from the date of sale of stock in trade for the purpose of section 54EC exemption

Quantum of exemption

  • Capital gains or amount invested in specified bonds, whichever is lower.
  • The maximum investment which can be made in bonds of NHAI and RECL, out of capital gains arising from transfer of one or more assets, during the previous year in which the original asset is transferred and in the subsequent financial year cannot exceed ₹50 lakhs.

Violation of condition

In case of transfer or conversion of such bonds or availing loan or advance on security of such bonds before the expiry of 3 years, the capital gain exempted earlier shall be taxed as long-term capital gain in the year of violation of condition.

Must Read  Analysis of Income from House Property (Part 2)

What is a Capital Gains Account Scheme (CGAS)?

Under sections 54, 54B, 54F and few other sections, capital gains is exempt to the extent of investment of such gains / net consideration (in the case of section 54F) in specified assets within the specified time. If such investment is not made before the date of filing of return of income (31st July/ 30th September of the assessment year), then the capital gain or net consideration (in case of exemption under section 54F) has to be deposited under the CGAS.

Time limit – Such deposit in CGAS should be made before filing the return of income or on or before the due date of filing the return of income, whichever is earlier. Proof of such deposit should be attached with the return. The deposit can be withdrawn for utilization for the specified purposes in accordance with the scheme.

What are the consequences if the amount deposited in CGAS is not utilized within the stipulated time of 2 years / 3 years?

If the amount deposited is not utilized for the specified purpose within the stipulated period, then the unutilized amount shall be charged as capital gain of the previous year in which the specified period expires. In the case of section 54F, proportionate amount will be taxable.

A CBDT Circular clarifies that in the event of death of an individual before the stipulated period, the unutilized amount is not chargeable to tax in the hands of the legal heirs of the deceased individual. Such unutilized amount is not income but is a part of the estate devolving upon them.

Is there any extension of time for acquiring new asset or depositing or investing amount of Capital Gain?

In case of compulsory acquisition of the original asset, where the compensation is not received on the date of transfer, the period available for acquiring a new asset or making investment in CGAS under sections 54, 54B and 54F would be considered from the date of receipt of such compensation and not from the date of the transfer.

I have also summarized the above-mentioned provisions in a tabular form for easy reference. Hope you find it useful

Section under which bene​​fit is availableGain eligible for claiming exemptionAsset in which the capital gain is to be re-invested to claim exemption
Section 54Long-term capital gain arising on transfer of residential house propertyGain to be re-invested in purchase or construction of one residential house property in India.
Section 54BLong-term or short-term capital gain arising on transfer of agricultural land.Gain to be re-invested in purchase of agricultural land.
Section 54FLong-term capital gain arising on transfer of any capital asset other than residential house property.Net sale consideration to be re-invested in purchase or construction of one residential house property in India.
Section 54ECLong-term capital gain arising on transfer of any capital asset.Gain to be re-invested in bonds issued by National Highway Authority of India or by the Rural Electrification Corporation Limited.