Updates from Budget 2024: Changes in Capital Gains Taxation
Key Highlights of the Amendment
The Finance Bill 2024 has reinstated the option for taxpayers to avail indexation benefits on the sale of immovable property. Taxpayers now have the flexibility to choose between:
- A 12.5% tax rate without indexation, or
- A 20% tax rate with indexation.
This allows taxpayers to select the option that minimizes their tax liability.
Important Points to Note
- Indexation benefits apply exclusively to land and buildings.
- This provision is limited to individuals and HUFs.
- The amendment impacts tax computation but does not alter exemptions or loss carry-forwards.
Revised Capital Gains Tax Rates
- Long-Term Capital Gains (LTCG):
- Annual exemption limit increased to ₹1.25 lakh (previously ₹1 lakh).
- LTCG on all assets taxed at 12.5%.
- Short-Term Capital Gains (STCG):
- STCG from financial assets taxed at 20%.
- STCG from non-financial assets taxed at slab rates.
Understanding Section 54F
Section 54F of the Income Tax Act provides tax relief on long-term capital gains from the sale of non-residential assets, provided the sale proceeds are reinvested in a residential property.
Conditions for Claiming Section 54F Exemption
Key Requirements
- Who is Eligible: Only individuals and HUFs.
- Ownership Limit: The taxpayer must not own more than one residential property (excluding the new property).
- Timeline for Investment:
- Purchase a new residential property within one year before or two years after the sale.
- Construct a residential property within three years of the sale.
- Holding Period: The new property must be held for at least three years from the date of purchase or completion of construction.
- Unutilized Proceeds: Any unused funds must be deposited in a Capital Gains Account Scheme (CGAS) before the ITR filing deadline to claim the exemption.
Capital Gains Account Scheme (CGAS)
The CGAS enables taxpayers to secure exemptions under Sections 54 and 54F by parking unutilized capital gains until they are reinvested.
Example:
Mr. Ramesh sold a commercial property in January 2023 for ₹30 lakhs, earning a capital gain of ₹12 lakhs. Since he couldn’t utilize the proceeds before the ITR filing deadline, he deposited the amount into a CGAS account. This step preserved his eligibility for the exemption.
How to Calculate Section 54F Exemption
Illustration:
- Sale Proceeds: ₹80 lakhs
- Capital Gains: ₹16 lakhs
- Reinvestment Amount: ₹60 lakhs
Formula for Exemption:
(Reinvestment Amount/Net Sale Consideration) ×Capital Gains (Reinvestment Amount / Net Sale Consideration) × Capital Gains (Reinvestment Amount/ Net Sale Consideration) × Capital Gains
Exempted Amount:
(60/80) ×16=₹12lakhs (60 / 80) × 16 = ₹12 lakhs (60/80) ×16=₹12lakhs
Situations Where Section 54F Exemption is Not Available
- Multiple Properties Owned: If the taxpayer owns more than one house at the time of sale (excluding the new one), the exemption cannot be claimed.
- Acquiring Additional Property: Purchasing another residential property within three years from the date of reinvestment voids the exemption.
- Non-Utilization of Proceeds: Failing to reinvest or deposit the funds in a CGAS account results in taxation of the capital gains.
Comparing Section 54 and Section 54F
| Criteria | Section 54 | Section 54F |
| Applicable Assets | Residential property | Non-residential property |
| Investment Requirement | Capital gains only | Entire sale consideration |
| Scope of Exemption | Full exemption for two houses (if LTCG ≤ ₹2 crores) | Proportionate to reinvestment |
| Ownership Restrictions | No specific restriction | Limited to one residential property |
Real-Life Case Study
Scenario:
Ms. Kavita sold a commercial plot in 2022, generating ₹40 lakhs in long-term capital gains. She invested ₹30 lakhs in constructing a residential house and planned further investments in the same property from another asset sale.
Result:
The ITAT clarified that Ms. Kavita could claim exemption under Section 54F for both transactions, provided the conditions of reinvestment and timelines were met.
Conclusion
Section 54F serves as an effective mechanism to reduce long-term capital gains tax by reinvesting proceeds into residential property. Taxpayers should adhere to the eligibility criteria, timelines, and reinvestment conditions to maximize the benefits. With the reintroduction of indexation benefits under Budget 2024, taxpayers now have enhanced options to optimize their tax liability. Careful planning and compliance with the rules can result in significant tax savings while aligning with the provisions of the Income Tax Act.
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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.
