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Capital gains exemptions under Finance Bill 2000
Ashok Rao
MARCH 20: Several changes have been suggested by the Finance Bill, 2000 in respect of the provisions regarding taxation of capital gains under the provisions of the Income-tax Act, 1961.The major of these changes are: (a) the withdrawal of exemptions from capital gains under the provisions of Sections 54EA and 54EB of the Act and the simultaneous insertion of section 54EC in the Act; and (b) an amendment to section 54F of the Act with regard to the benefits under the section vis-a-vis owning a residential house on the date of the transfer of the asset. As far as Sections 54EA and 54EB are concerned, the availability of benefits of these sections are sought to be withdrawn for transfers taking place on or after April 1, 2000. But, first let us look at what those sections provide. Under both the sections, viz, Sections 54EA and 54EB, capital gains arising from the transfer of long term capital asset which are invested within a period of six months after the date of such transfer in the securities specified therein would entitle the assessee for an exemption of capital gains, either wholly or partially, depending upon how much is invested. The differences between Sections 54EA and 54EB are: Under Section 54EA, the benefit would become available if the whole or a part of the net consideration on transfer of the asset were to be invested in the specified securities whereas under Section 54EB, there is only a requirement of investing the amount of the capital gain; and If the claim for exemption is on the basis of the net consideration invested, under section 54EA, the assets would have to be compulsorily held for a period not less than three years only. Under section 54EB, however, where the claim is on the basis of the capital gain invested, the period of compulsory holding of the specified asset is seven years.The choice of choosing either Section 54EA or 54EB was left to the assessee. The principle is simple. If the whole of the consideration received on the transfer of the asset is to be invested, the period of holding is less, viz, three years. If, on the contrary, only the capital gain were to be invested, the period of holding would have to be longer, viz, seven years. Withdrawal from the specified securities or taking a loan thereon within the statutory periods mentioned in Sections 54EA and 54EB would visit the assessee with the penalty of having the capital gain which was exempt being taxed in the year of transfer or conversion of the asset or taking of the loan against the asset. The aforementioned provisions of Sections 54EA and 54EB will now no longer be available in respect of transfers of a long term asset made on or after April 1, 2000. However, if the transfer is made before April 1, 2000, the period of investment of six months in the specified assets under Sections 54EA or 54EB would continue to be available in respect of capital gain arising on such transferred assets and the benefit of investment in the securities specified under Sections 54EA and 54EB would also continue to be available for the period of six months from the date of transfer. Thus, if the transfer takes place on, say, March 29, 2000, the investment could be made in the specified securities under Sections 54EA and 54EB upto September 28, 2000. Instead of Sections 54EA and 54EB, it is now sought to insert a new Section 54EC with effect from April 1, 2001, ie, with effect from assessment year 2001-2002. Under section 54EC, provisions regarding investments, viz, six months from the date of transfer resulting in capital gain remains the same. The differences are: Instead of the specified assets as mentioned in Sections 54EA and 54EB (which included units of Mutual Funds, et al), now, the specified assets would be only two, viz, bonds redeemable after five years issued by the National Bank for Agriculture and Rural Development (Nabard) or by the National Highways Authority of India (NHAI); The period of holding which was three years under section 54EA and seven years under section 54EB is now the mean period of 5 years under the proposed section 54EC; Unlike the Sections 54EA & 54EB, which provided for investments either of the net consideration (with a holding period of three years) or of the capital gain (with an increased period of holding of seven years), under section 54EC, it is only the capital gains which needs be invested;The provisions regarding proportionate relief for proportionate investment in the long term specified assets remains the same. So too, the provisions regarding taxing the capital gain in the year in which the long term specified asset is transferred or converted into money or on the security of which a loan or advance is taken. Another major change sought to be made regarding capital gains is the amendment of section 54F of the Act. It must clearly be understood before we proceed to see the proposed amendment that as far as a residential house is concerned which is sold and reinvested in another house, the exemption in regard to the capital gain arising on the sale of such residential house is covered by Section 54 of the Act. And under section 54, there is no restriction on the number of residential houses which a person is holding to get the benefit of the exemption. Thus, even if he holds three or four houses and sells one of these and reinvests in another residential house, the capital gain arising out of residential house would still be entitled to the exemption under Section 54 subject to meeting the other para-meters therein. Section 54F, however, covers an asset, other than a residential house, which is transferred.In order to get the exemption under section 54F, one of the parameters was that on the date of transfer of the concerned asset (not being a residential house), the assessee should not have held any other residential house.In such an event, the assessee could invest in a residential house and the capital gain is exempted, subject to the parameters laid therein. What the Bill proposes is that with effect from assessment year 2001-2002, the provisions of section 54F would apply even if the assessee held on the date of transfer of the concerned asset only one residential house. In other words, if a person holds one residential house only on the date of transfer of the asset (other than a residential house), he would be entitled to claim the exemption provided therein subject to the parameters laid down in Section 54F, unlike earlier when he would be preempted from the benefit of the section if he had held a residentialhouse on the date of the transfer of the concerned asset. These are the two major changes proposed to be made in respect of capital gains under the provisions of the Act. I believe it is premature to have withdrawn the reliefs under Sections 54EA and 54EB. The author is a chartered accountant Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.
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