The >Union Budget 2014-15 has introduced three important amendments affecting the taxation of capital gains.
At present, Section 54 of the Income Tax Act provides that when an assessee sells his residential house (held for more than three years) and invests the gain in another residential property, the gains will be exempt from tax to the extent of investment in the new asset. Similarly, Sec. 54F provides that when an assessee sells in any other capital assets (held for more than three years) and invests the proceeds in a residential house, the gains will be exempt to the extent of investment in the new property.
Both the sections use the word ‘a residential house’. Many judicial forums have held that the intention of the section is to promote investment in the residential property and, therefore, took a liberal view of the words ‘a residential house’ and held that even the investment can be made in more than one unit, whether in the same building or other.
This section also did not prohibit investment outside India. Many affluent people have sold their property in India and invested the proceeds in a residential house abroad. To prevent exemption in respect of such cases, the law had been amended to restrict the investments in a residential property in India only. The amendments seek to annul the decisions of the various tribunals and clarified that the investments can be made only in one residential house even if two flats were in the same building. This is an unnecessary and unwise amendment.
Similarly, Sec. 54EC provides that if the sale proceeds are invested in one specified security like bonds issued by National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC); exemption will be allowed in addition to the one under Sec. 54 and 54F to the extent of Rs.50 lakh in a financial year. It has been brought to the notice of the government that in some cases the sale was registered in the later half of the year, say December, and one investment of Rs.50 lakh was made before March 31 and another Rs.50 lakh in the first week of April. Thus, such a person gets an extended exemption to the extent of Rs.1 crore, which, according to the government, was not intended. Sec.54C has been amended to restrict the above to Rs.50 lakh in all. It is not clear why the government, which appears to encourage investments in infrastructure, should attempt to restrict these investments. On the contrary, it would be wise to remove the limit of Rs.50 lakh and allow unrestricted investments. However, if a property is jointly owned by two persons, say husband and wife, each one of them would be entitled to purchase a house property and invest Rs.50 lakh each in bonds and claim exemption.
A new section has now been introduced to plug a legal loophole. If a person receives an advance for sale of his property and if the sale did not materialise and the advance forfeited, such forfeited amount was hitherto not taxable but reduced from the cost of the asset. This has led to a lot of unhealthy practice. Now the law has been amended by inserting a new Section 56(2)(ix) stating that such forfeited advance will be taxable as income from other sources and taxed at 30 per cent.
The author is a Chartered Accountant
