Exemption against Long Term Capital Gain u/s 54 & 54F: An Anomaly
There are various provisions in the Income Tax Act which operates in an un-synchronized manner. As a result, every section of Income Tax Act – 1961 needs to be reads in isolation. There is no scope of presumptions and assumptions. There are separate penal consequences for similar nature of defaults under various provisions. One such instance is there in section 54 vis a vis Section 54F of the Income Tax Act – 1961.
Section 54 enables all Individual or HUF taxpayers to save Long Term Capital Gain (LTCG) tax arising from transfer of any residential house property if such taxpayers invests the amount of LTCG for purchase /construction of another residential house property. Section 54F enable such taxpayers to save Long Term Capital Gain (LTCG) tax arising from transfer of any capital assets (other than residential house property) if taxpayer invests the amount of net sale consideration in the similar way. Most of the exemptions provisions in the Income Tax Act – 1961 are not absolute but are subject to certain terms & conditions attached to it. One such condition attached to section 54 as well as section 54F requires taxpayers not to sale the new house property within a period of 3 years from the date of its acquisition. If the new house property is transferred within a period of 3 years then exemption granted would stand withdrawn. The methodology of penal consequence by way of withdrawal of capital gain exemption differs in case of section 54 vis a vis section 54F.
In case of taxpayers who have claimed exemption u/s 54:
If taxpayers transfer the new house property so purchased/constructed for claiming exemption u/s 54 within a period of 3 years, the cost of acquisition of new assets is required to be adjusted for computing capital gain on its sale. Amount of LTCG claimed as exempt is required to be reduced from the actual cost of acquisition of new assets to arrive at the adjusted cost in such cases. For example, let us consider a case of Mr. Ram who has sold his house property for Rs. 1 Crore in FY 2018-19 & has earned LTCG of Rs. 60 Lakh. To save tax, he has invested an amount of Rs. 65 Lakh for purchase of another house property within prescribed time. As a result, his taxable LTCG becomes Nil in the FY 2018-19. Now if for any reason whatsoever, Mr. Ram sale the flat, say for Rs. 70 Lakh, within a period of 2 years then his capital gain on sale of this new assets would be Rs. 65 Lakh (i.e., cost of acquisition would be treated at Rs. 5 Lakh as the capital gain of Rs. 60 Lakh claimed exempt earlier would be reduced from the actual purchase price Rs. 65 Lakh). More surprisingly, amount of Rs. 60 Lakh would be reckoned as Short Term Capital Gain (STCG) as the present property is disposed off within a period of 2 years. In short, original LTCG of Rs. 60 Lakh becomes taxable as STCG for violation of 3 years clause.
In case of taxpayers who have claimed exemption u/s 54F
If taxpayers transfer the new house property so purchased/ constructed for claiming exemption u/s 54F within a period of 3 years, then the amount of LTCG claimed exempt becomes chargeable to tax in the year in which the new house property is sold. For example, let us consider the case of Mr. Shyam who has sold Gold & ornaments for Rs. 1 Crore in FY 2018-19 & has earned LTCG of Rs. 60 Lakh. To save tax, he has invested entire sale proceeds of Rs. 1 Cr for purchase of another house property in FY 2018-19 itself. As a result, his taxable LTCG becomes Nil in the FY 2018-19. Now if for any reason whatsoever, Mr. Shyam sale the house for Rs. 1.05 Cr within a period of 3 years then his capital gain would be as under:
a) STCG of Rs. 5 Lakh
b) LTCG of Rs. 60 Lakh
Effectively, Mr Shyam would not be at loss even though the new house is transferred within a period of 3 years. In the case of Mr. Shyam, amount of Rs. 60 Lakh would be taxable as LTCG only as against Mr. Ram in whose case the amount would be taxable as STCG (though it was LTCG originally). Although the purpose of both the section (54 & 54F) is same i.e., to grant an exemption from LTCG, its real impact is drastically different.
Winter session of the parliament ahead is sure to witness the lot of discussion over the simplification of tax laws. Hopefully, lot of such provisions will be synchronized in days to come. Let us hope that Union Budget – 2020 with its thrust on simplification removes all such anomalies.
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