When an individual sells a property or any capital asset, it generally involves capital gain, unless the selling price is lower than the purchase price. Generally, people tend to sell a capital asset at a price, which is more than its purchase price, resulting in capital gain. Such gains or profits are taxable.
Capital gains may of two types – short term capital gain (STCG) or long term capital gain (LTCG). If an immovable property is sold within 24 months of its purchase, any gain from it will be considered as STCG. For other capital assets, the holding period STCG is 36 months or less.
On the other hand, the capital gains would be long term in nature if the immovable property sold after 24 months from the date of its purchase. For other capital assets, long term capital gain will arise if the asset is sold after 36 months from the date of purchase.
However, there are provisions to save taxes on capital gains through some adjustments or through some investments.
“The provisions of section 54 and section 54GB provide for exemption from long term capital gains in case of an individual or HUF available on reinvestment of capital gains and reinvestment of sales proceeds respectively,” said Dr. Suresh Surana, Founder, RSM India.
Except for equities and equity-oriented mutual funds (MFs), the short-term capital gain is added to total income of a person in the financial year, in which the capital asset while the rate of tax on LTCG is 20 per cent after indexation.
The provisions under the two sections of the Income Tax Act are explained by Dr. Surana as follows:
Section 54 – Investment of Capital Gains in Residential house property
As per section 54, to claim exemption, taxpayers must buy a house property within 2 years from the date of transfer or construct a new property within 3 years from date of transfer. Exemption will be available even if asseesee purchases house property before transferring the existing house provided if it is purchased within 1 year prior to the date of transfer. Provided that if the capital gains does not exceed Rs 2 crore, the reinvestment benefit, the assessee may at his option invest in ‘two residential houses’ in India.
Section 54GB – Investment of Sale Proceeds of Residential house property in eligible business
The provisions of section 54GB can be availed by the Individual or HUF for seeking exemption from long term capital gains, in case where:
- the capital gain arises from the transfer of a residential property held for more than 24 months; and
- such assessee furnishes the return of income within the specified due date and utilises the net consideration for subscription in the equity shares of an eligible company (company includes investment in Small and Medium Enterprises under the Micro, Small and Medium Enterprises Act, 2006 and also start-ups); and
- the company has, within 1 year from the date of subscription in equity shares by the assessee, utilised the sale proceeds for purchase of new asset (includes plant and machinery for a manufacturing company and in case of start-ups has been further relaxed to include computer and computer softwares).
However, due to nationwide lockdown to contain the spread of Novel Coronavirus COVID-19, many sellers of capital assets may have missed the deadline to comply with the above provisions to save taxes.
Owing to the current COVID-19 crisis, the Government has provided relief measure for rollover benefit of capital gains exemption to be claimed by the assesse under section 54 and 54GB if the investment/purchase/construction is made upto June 30, 2020 for all due dates otherwise falling between March 20, 2020 and June 29, 2020.
Benefits of Extension of the timeline upto June 30, 2020 w.r.t. section 54 and 54GB
- Under section 54 for purchase or construction of the new residential property for which the period was expiring between March 20, 2020 and June 29, 2020, the assessee would get the extended time upto June 30, 2020 for reinvestment of the capital gains.
- For the purpose of claiming deduction under Section 54GB in respect of capital gains on sale of residential property, investment in equity shares of specified companies can be made within the due date for filing return of income (i.e. July 31, 2020) and there is no change for the same.
“However, in case of section 54GB, for purchase of new assets (company is required to purchase new assets within 1 year from the date of subscription in equity shares) the timeline for which was expiring between March 20, 2020 and June 29, 2020, the assessee would get increased time upto June 30, 2020 to purchase such new assets (includes plant and machinery for a manufacturing company and in case of start-ups has been further relaxed to include computer and computer softwares),” said Dr. Surana.