Proposal to limit capital gains deduction

Here is an interesting article for you. Let’s take a look at sections 54 and 54F of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) and how the budget has proposed to amend it.

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What does the existing provision tell?

The existing provisions of section 54 deal with capital gains on the sale of a residential house. The section deals with the capital gains deduction will be available only if the capital gains arising out of the sale consideration of a residential house are reinvested in another residential house. It also has a one-time provision where a person can plan to invest in two residential houses.

Further, the provisions of section 54F of the act say that the deduction will be available on the long-term capital gains arising out of long-term assets other than a residential house only if the whole of the sale consideration is reinvested in a residential house.

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Proposed Amendment

Recently, the Honorable Finance Minister through the new budget has proposed certain amendments under these sections. The new budget has proposed to set a limit on the reinvestment of sale consideration to 10 Crores. Therefore, under section 54 the maximum deduction that is available is capped at 10 crores. In other words, if the new residential house costs more than 10 Crores, then its cost is deemed to be 10 Crores and not the amount that is exceeding this.

Further, under section 54F it is proposed to limit the maximum deduction to 10 crores. If the new residential house costs more than 10 Crores then its cost is deemed to be 10 Crores.

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Let us understand these amendments with numbers.

Section 54

Existing provision

Net Sale Consideration - 20 crore

Indexed cost of acquisition - 8 crore

Long-term capital gains - 12 crore

Investment in a new eligible residential house - 15 crore

Deduction under the existing provisions of section 54 would be 12 crores and there would be no capital gains tax under the existing provision.

Proposed provision

The deduction under the proposed provision would be capped at 10 crores. Accordingly, the taxable capital gain would be 2 crores.

Exceptions to this proposal

• If one is planning to sell a house and reinvest it in another residential property that will cost more than 10 crores, and the transaction is taking place before March 31, 2023
• If the transaction is resulting in capital gains of less than 10 crores and the new house is less than 10 crores

Section 54F

Existing provision

Net Sale Consideration - 20 crore

Indexed cost of acquisition - 8 crore

Long-term capital gains - 12 crore

Investment in a new eligible residential house - 20 crore

Deduction under the existing provisions of section 54F would be 12 crores and there would be no capital gains tax under the existing provision.

Proposed provision

The deduction under the proposed provision would be capped at 10 crores. Accordingly, the taxable capital gain would be 6 crores.

Exceptions to this proposal

• If one is planning to sell a long-term asset other than a residential house and reinvest it in another residential property that will cost more than 10 crores, but the transaction is taking place before March 31, 2023
• If the transaction is resulting in a sale consideration of less than 10 crores and the new house is also less than 10 crores

Proposal to CGAS

Provisions of sections 54 and 54F provide that in case the purchase of the new residential property does not take place before the due date of filing the return of income of such year, then time can be taken by investing the said sum in Capital Gains Account Scheme (also referred to as CGAS).

Since the deduction under these two sections is capped at 10 crores, the provisions to invest under CGAS are capped at 10 crores.

Do visit your Chartered Accountant in case your transaction is attracting capital gains and figure out what could be done in your case.

Authors - Taarakesh Sunku and Ritika M

#budget2023 #capitalgains #cgas #residentialhouse