The budget presented by the Finance Minister has proposed many changes affecting computation of capital gains. Let us discuss the major proposals
- Reducing the holding period requirement for immovable property
- Generally the profits on sale of capital assets become taxable on the basis of the period for which the asset is held on the date of sale. This varies between 12 months to 36 months depending on the type of capital asset.Hitherto for immovable property the holding period requirement has been 36 months. The budget proposes to reduce this to 24 month and bring it on par with unlisted shares. This amendment is also very beneficial for the taxpayers as once the capital asset sold by you qualifies for being long term asset, you just need to pay tax @ 20% on the profits so made and that too with the benefit of indexation. Moreover this also gives you various options to save the taxes by investing the sale proceeds/capital gains in residential house /capital gains bonds and thus legally escape from the liability to pay any long term capital gains. It may be noted that short term capital gains on sale of your immovable property are treated like your normal income and are taxed at the slab rate applicable to you. Moreover there are no investment options available to you to save the tax on such short term capital gains.
- Shift of the base year for indexation of cost of acquisition
- Presently in case the capital asset sold by you was acquired by you prior to 1st April 1981 you have the option to substitute the fair market value as on 1st April 1981 as cost of acquisition and take the benefit of indexation on such fair market value on the basis of cost inflation Index for the year of sale announced by the government from time to time. The budget proposes to shift the date from 1st April 1981 to 1st April 2001. This will be beneficial for the tax payers as the price appreciation between the date of acquisition and 1st April 2001 will become fully tax free. Though the government allows you the benefit of partly enhance the cost by applying the [cost inflation index] but this just covers the appreciation in the asset which is evident from the prices of equity shares in India. For example the cost inflation index of 1125 for the financial year 2016-2017 with a base of 100 for 1981-82 gives average of 7.16%. Whereas the Sensex value of 100 with base of 1979 has grown to 28240 on 3rd February 2017 thus growing by 16.47% on annual basis. So by shifting the base year the finance minister proposes to give the taxpayers big relief as the price appreciation during the date of acquisition till date of sale has become fully tax free in your hand.
- Some transactions not to be treated as transfer and cost of acquisition for such transactions
- There are certain transaction as enumerated in section 47 of the Income Tax Act, which though result into a different asset but are not treated as transfer for the purpose of computation of capital gains and therefore do not attract any tax liability. The finance minister has proposed to treat the event of conversion of preference shares into equity share of a Company not to be regarded as transfer. The finance minister has also proposed to make some changes in the law for the purpose of ascertainment of cost for computation of capital gains on sale of such shares. The budget proposes that the cost of the original preference shares shall be treated as cost of the equity shares sold. The budget also proposes that the cost for original units which are merged in the new scheme on consolidation of different schemes of a mutual fund shall be taken as the cost for the purpose of computation capital gains. The transaction for such consolidation is not be treated as transfer under Section 47 was provided for by the budget of 2016. Likewise the period for which the preference shares and the old units were held by the tax payer shall also be taken into account while computing the holding period of these shares and units.
- Date of transfer in case of transactions of redevelopment of property
- Since giving of possession of an immovable property in part performance of an agreement is treated as transfer under the income tax laws, the cases of redevelopment of property which are very common nowadays have resulted into litigation and have caused genuine hardship to the taxpayers. The budget proposes that in case of individual and HUF taxpayers, the date of transfer for the purpose of redevelopment of property shall be the date on which the completion certificate of the project or part of the project is issued by the competent authority like Municipality, gram panchayat or area development authority like Delhi development Authority. So the capital gains computations, indexation and the period for claiming exemption will apply accordingly. However in case the transferee sells his right under the project before completion of the project, the year in which he transfer such right shall be taken for the purpose for capital gains computations.
- Conditions for claiming exemption on transfer of listed shares
- Presently Section 10(38) of the income tax act exempts capital gains which arises on sale of a equity shares listed on any stock exchange in India and held for more than 12 months and on which security Transactions Tax (STT) has been paid. This provision has been grossly misused by people for money laundering so the budget provides an additional conditions in respect of equity shares acquired after 1st October 2004, the date on which STT became applicable. The budget provides that for such shares the long term capital gains shall become exempt only if STT has been paid on purchase of such transactions as well. The government is being authorised to notify some other acquisitions on which though no STT has been paid will still continue to be exempt under Section 10(38). This notification should include the shares acquired under IPO, FPO, bonus shares, ESOPs etc. to carve out genuine transaction of acquisition of listed shares.
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)