Neha Malhotra, Executive, Nangia Advisors (Andersen Global) with inputs from Radhika Arora
The taxation system in India has been designed to ensure equity and fair play in its operation. The Income-tax Act, 1961 (Act) facilitates the taxpayers with various tax-perks by way of diverse exemptions, incentives, deductions etc. It has in store many tax sops for those earning income from capital gains. Though income from the sale of long term capital asset invites taxation as capital gains, it may be exempt if it gets invested in specified assets. A taxpayer should know these effectual schemes framed for the well-being of sellers of capital assets and plan its investments accordingly.
The taxpayer can reap the benefit of exemption of capital gains if the same are invested in various schemes introduced by the government. The 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. An 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 the type of long-term capital asset and secondarily, on the underlying asset in the investment undertaken. Accordingly, the taxpayer becomes entitled to claim an exemption under sections 54, 54B, 54D, 54EC, 54F, 54GB of the Act.
An exemption is also for gains on the sale of assets other than house-property
A blanket exemption is available upon sale of any type of long-term capital asset in the case where the amount of capital gains is invested in specified bonds within six months of the date of transfer the asset, which was held for the period of three years or more. Alternatively, another option is operative for those who desire to invest in residential property and not in specified bonds to claim exemption of gains arising from the sale of any long-term capital asset except a residential house. Such taxpayers can claim an exemption if it purchases a residential house property one year before or two years after the transfer of the property or constructs within 3 years a residential house.
A capital gain exemption is not restricted to investment in a house-property!
Three different alternatives, namely, specified bonds, residential house, equity shares are available for taxpayers selling a residential house property depending upon their choice and fulfilment of conditions. Similarly, capital gains arising from the sale of agricultural land, compulsory acquisition of land is available upon investment in the specified asset.
Claiming exemption has its own share of complications!
It is worthwhile to note that all these exemptions are accessible only upon adherence to conditions and manner specified by the Act. Many taxpayers have encountered complexity while 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 generally achieved favourable view on this issue from the authorities at a higher level. Many other issues ranging from date of investment, sale or purchase of more than one property, investment in under-construction property, possession not received within the specified time, purchase of specified bonds before the sale of a property, claim of exemption under two different sections simultaneously may pose a challenge in claiming exemption. Taxpayers may have to deal with a dilemma in the selection of the investment options provided by the Act i.e. purchase of a house or specified bonds.
Government is ironing the creases!
With the interim budget 2019, the government has taken a step to ease off the aforesaid complexity in availing of exemptions. For improving the real estate affordability and availability of accommodation, the benefit of capital gains exemption under section 54 of the Act was increased from investment in one residential house to two residential houses for a taxpayer having capital gains up to INR 2 crore. However, this benefit can be availed once in a lifetime. Also, the Supreme Court had affirmed a position that exemption under section 54/ 54F of the Act can be claimed in respect of the new residential house which consists of a number of independent units.
Exempting the capital gains with the help of these incentives is pivotal in the health of the economy and investors. Designing of these incentives have been undertaken to achieve a certain purpose and remove the genuine hardships of the taxpayers.