The finance minister has proposed some provisions dealing with capital gains in the Budget 2023 presented today. In this article I shall discuss the main proposals relating to capital gains.
Cap on availing long term capital gains by investment in a residential house
Present tax laws allow you exemption from long term capital gains if you invest in acquiring a residential house within specified time limits. Section 54 allows you exemption on long term capital gains on sale of a residential house if you invest the indexed long term capital gains for purchasing or constructing a resident house within specified time limits. Likewise, Section 54F allows you exemption from long term capital gains on sale of any asset other than a residential house if you invest the net consideration received to buy or construct a residential house within specified time limits.
Presently there is no restriction on the amount up to which you can claim the exemption from long term capital gains by investing in a residential house. The proposal in the budget attempts to put a cap of Rs 10 crore for value of investment in residential house in respect of which you will be able to claim exemption either under Section 54 or 54F.
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Please note the proposal does not put any restriction on the value of the residential which you can buy or invest in, what the proposal provides is that in case the investments in the residential house exceed Rs 10 crore, the deduction will be claimed with respect of Rs 10 crore only.
In case the full amount of indexed capital gains in case of Section 54 and full net consideration received in case of Section 54F is not invested for acquiring a residential house, the exemption available gets reduced proportionately.
Taxation of Market Linked Debentures
Market linked debentures are new innovation in the financial market where your returns are linked with the return generated by some external security or equity benchmark. This provides capital protection to the investors and at the same time lets the investors participate in the returns generated by underlying security or indices. Present laws do not have any clarity on taxation of such market linked debentures.
The budget proposes to provide for methodology for taxation of profits realised on transfer/redemption of such market linked debentures. The finance minister has proposed that any profit made on market linked debentures shall be treated as short term capital gains irrespective of the holding period. The proposal also provides that in addition to the cost of acquisition/purchase the investor will be allowed to claim deduction in respect of expenditure incurred in connection with such transfer but no deduction shall be available in respect of any Security Transaction Tax (STT) paid for such transaction.
I am sure the above discussion will help you understand the capital gains provisions better.
(The author is a tax and investment expert and can be reached at jainbalwant@gmail.com)