Tax Exemption on Capital Gains
Taxpayers can reap the benefit of tax exemption on capital gains if these are invested in various schemes introduced by the government. The Income Tax (I-T) Act grants total/ partial exemption of capital gains under various schemes. The benefit of exemption spans across varied capital gains arising on transfer of any long-term capital asset, i.e., capital gains arising from the sale of a house property, agricultural land, compulsory acquisition of land, plot of land, etc.
Exemption can also be claimed on sale of any other long-term capital asset (other than aforesaid). However, the claim of exemption is primarily dependent on type of long-term capital asset and secondly, on the underlying asset in the investment undertaken. Accordingly, the taxpayer becomes entitled to claim exemption under Sections 54, 54B, 54D, 54EC, 54F, 54GB of the Act.
A taxpayer can claim exemptions under the following sections:
- Sec 54 of IT Act says that if the taxpayer is an individual or a member of Hindu Undivided Family, the capital gain is obtained as a result of transfer of a long term asset such as building or land or even residential house shall be exempted if the taxpayer purchases another property within a year or 2 years and if he constructs another residential house in India within 3 years after the transfer is made, then he will not be charged for capital gain tax. This exemption is not applicable to companies, firms or LLP.
- Sec 54B of IT Act discusses the condition for availing exemptions by the individual or a HUF. This section is made available only for the sale of agricultural land. The agricultural land must be used for the agricultural purpose for at least 2 years before the date of transfer by the individual. If the taxpayer buys another land within 2 years from the transfer date, the exemption is applicable. He has no rights to reinvest in agricultural lands. If the taxpayer claims exemptions and if he transfers the new agricultural land within 3 years from the acquisition date, then the exemption will be withdrawn. It is applicable for both long and short term capital gains.
- Sec 54EC of IT Act provides that if the taxpayer within 6 months from the sale date/ transfer date has invested the capital gain in long term specified bonds issued by NHAI and REC or by the central government for a period of minimum 3 years (5 years if it is issued on or after 1st April 2018) shall be exempted to maximum limit of Rs.50 Lakhs. If the taxpayer has converted the property into cash or advances as a loan within 3 years from the acquisition date, the capital gain exemption will be withdrawn.
- Sec 54F of IT Act provides that the taxpayers are exempted for the capital gains for the transfer of any capital asset other than residential house and the net consideration has been re-invested in purchase of one residential house within a year before the transfer or within 2 years after the transfer, If the taxpayer possess more than one residential property, then he will be deemed from exemption. If he constructs an addition residential property within 3 years from the transfer date, then he will be exempted from capital gain tax.
Thus the capital gain Tax helps in reducing the future tax rate and improves investment returns. This puts an end for double taxation.
What is the amount of Exemption available under Section 54 of the Income Tax act?
The amount of exemption under Section 54 of the Income Tax Act for the long-term capital gains will be the lower of:
- Capital gains arising on transfer of residential house. Or
- Investment made in purchase or construction of a new residential house property. Hence, the balance capital gains (If any) will be taxable.
Options for Tax Exemption on Capital Gains
1. Sale of assets other than House Property
A blanket exemption is available upon sale of any type of long-term capital asset where the amount of capital gains is invested in specified bonds within six months of date of transfer the asset, which was held for a period of three years or more. Alternatively, another option exists for those who desire to invest in a residential property and not in specified bonds to claim exemption of gains arising from sale of any long-term capital asset except a residential house. Such taxpayers can claim exemption if they purchase a residential house property one year before or two years after the transfer of the property or construct within three years a residential house.
Capital gain exemption is not restricted to investment in a house property. Three different alternatives:
- Specified bonds,
- Residential house,
- Equity shares
These are the options available for taxpayers selling a residential house property depending upon their choice and fulfillment of conditions. Similarly, exemption on capital gains arising from sale of agricultural land, compulsory acquisition of land is available upon investment in the specified asset.
2. Complications in claiming Exemption
Many taxpayers have encountered difficulty in availing these exemptions. Certain positions are unclear and may be litigated by the tax authorities. Joint ownership can be a possible area of litigation wherein tax authorities may seek to deny the benefit on the basis of this single contention. Taxpayers have usually achieved favourable view on this issue from authorities at a higher level.
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