Section 54, 54EC, 54F: Capital Gain Tax Exemption in 2023

Capital Gain Tax Exemption in 2023

In India, capital gains tax applies to profits earned from selling assets such as real estate or investments in stocks and mutual funds. However, the Income Tax Act provides certain provisions for capital gain tax exemptions to encourage investment and promote economic growth. Sections 54, 54EC, and 54F of the Income Tax Act play a crucial role in allowing taxpayers to save on tax liabilities when they reinvest their capital gains in specified avenues. This article aims to understand these sections and their relevance in 2023 comprehensively.

What is capital gain tax and its tax implications?

Under income tax, capital gain refers to the profit earned from selling or transferring certain capital assets, such as real estate, stocks, mutual funds, bonds, or other investments. When the asset’s selling price is higher than its original purchase price or acquisition cost, the difference between the two is considered a capital gain. However, if the selling price is lower than the purchase price, it results in a capital loss.

Capital gains are categorized into two types:

1. Short-term Capital Gains (STCG): When a capital asset is held for a period of up to 12 months (24 months for certain assets like immovable property and stocks), the resulting gain or loss is classified as short-term capital gains (STCG). These gains are taxed at a higher rate than long-term capital gains and are added to the taxpayer’s income, attracting the applicable income tax slab rates.

2. Long-term Capital Gains (LTCG): If a capital asset is held for more than 12 months (24 months for certain assets) before its sale, the gains or losses fall under long-term capital gains (LTCG). Long-term capital gains enjoy certain tax benefits and are taxed at a lower rate.

Tax implications of capital gains in India:

1. Tax on Short-term Capital Gains:

For individuals and HUFs (Hindu Undivided Families), short-term capital gains are added to their total income and taxed according to their applicable income tax slab rates.

For companies, short-term capital gains are taxed at a flat rate, which is generally the applicable corporate tax rate.

2. Tax on Long-term Capital Gains:

Until March 31, 2021, long-term capital gains on listed equity shares and equity-oriented mutual funds were exempt from tax. However, starting from April 1, 2021, LTCG on listed equity shares and equity-oriented mutual funds exceeding Rs. 1 lakh in a financial year is taxed at 10% (without the benefit of indexation).

For other long-term capital assets, LTCG is taxed at 20% (with the benefit of indexation) after considering the cost inflation index to adjust the purchase price for inflation.

3. Indexation Benefit:

For long-term capital gains on assets other than listed equity shares and equity-oriented mutual funds, taxpayers can adjust the cost of acquisition for inflation using the Cost Inflation Index (CII) published by the Income Tax Department. This indexation helps in reducing the taxable long-term capital gain amount, resulting in lower tax liability.

4. Exemptions from Long-term Capital Gains Tax:

Some investments and assets are eligible for specific exemptions under different sections of the Income Tax Act. The most common exemptions are available under Sections 54, 54EC, and 54F, where taxpayers can reinvest the capital gains in specified assets like residential property or bonds to avail of tax benefits.

5. Tax Deduction at Source (TDS):

In some instances, where capital gains arise, the buyer must deduct TDS (Tax Deducted at Source) before paying the seller. The TDS rates vary depending on the type of asset and the applicable tax rules.

Taxpayers must know these tax implications and plan their investments and capital asset transactions accordingly to optimize their tax liabilities and take advantage of available exemptions and benefits. Consulting a tax advisor or financial expert can be beneficial in understanding the specific tax implications based on individual circumstances.

Through this article, we will discuss the capital gain tax exemption benefit in 2023 under sections 54, 54EC, and 54F.

Section 54: Capital Gain Tax Exemption on Residential Property:

Section 54 of the Income Tax Act provides relief to individuals who have made gains from selling a residential property. To avail of this exemption, the taxpayer must reinvest the capital gains in purchasing or constructing another residential property within the specified time frame.

Key Points of Section 54:

• Eligibility: Only individuals and Hindu Undivided Families (HUFs) are eligible for this exemption.

• Property Type: The property sold must be residential.

• Reinvestment Time Frame: Taxpayers have the option to invest in a new residential property either one year before the sale or two years after the sale. Alternatively, they can invest in constructing a new residential property within three years of the sale.

• Exemption Amount: The entire capital gain or investment amount, whichever is lower, is exempt from tax.

For example, suppose an individual sells a residential property in 2023 and earns a capital gain of Rs. 30 lakhs within two years of the sale. If they invest Rs. 25 lakhs in a new residential property, the entire capital gain of Rs. 30 lakhs will be exempt from tax.

Section 54EC: Capital Gain Tax Exemption on Bonds:

Section 54EC allows taxpayers to save on capital gains tax by investing in specified bonds. These bonds are issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) and are commonly known as 54EC bonds.

Key Points of Section 54EC:

• Eligibility: Both individuals and HUFs can avail of this exemption.

• Investment Time Frame: Taxpayers must invest in these bonds within six months from the date of the asset’s transfer to claim the exemption.

• Lock-in Period: The investment in these bonds comes with a lock-in period of five years, during which the taxpayer cannot sell or transfer the bonds.

• Exemption Limit: The maximum amount to be invested in these bonds for tax exemption is Rs. 50 lakhs.

It is essential to note that while Section 54 allows the exemption of capital gains arising from the sale of residential property, Section 54EC applies to capital gains from the sale of any long-term asset, not just residential property. Taxpayers can choose the most suitable option based on their circumstances.

Section 54F: Capital Gain Tax Exemption on Other Assets:

Section 54F relieves individuals and HUFs when they earn capital gains from selling any long-term asset other than residential property. It allows them to invest the capital gains in purchasing or constructing a new residential property to claim tax exemption.

Key Points of Section 54F:

• Eligibility: Only individuals and HUFs can claim this exemption.

• Reinvestment Time Frame: Taxpayers can invest in a new residential property either one year before the asset’s transfer or two years after the transfer. Alternatively, they can invest in constructing a new residential property within three years of the asset’s transfer.

• Exemption Amount: To claim full exemption, the sale proceeds must be reinvested in the new residential property. A proportional exemption is allowed if only part of the capital gain is reinvested.

For instance, if an individual earns a capital gain of Rs. 50 lakhs from the sale of stocks in 2023 and invests Rs. 30 lakhs in a new residential property within two years, the exemption will be applicable only on the invested amount, i.e., Rs. 30 lakhs, and the remaining Rs. 20 lakhs will be taxable.

Conclusion:

In 2023, Sections 54, 54EC, and 54F continue to play a significant role in providing tax relief to taxpayers who have earned capital gains. These provisions encourage investments in real estate and specified bonds, stimulating economic growth. Taxpayers must be aware of these sections’ nuances and take advantage of the opportunities for capital gain tax exemptions by adhering to the specified timelines and investment requirements. As always, consulting a tax advisor or financial expert can provide tailored guidance and help maximize the benefits of these provisions.

Looking to file your Income Tax Return (ITR) hassle-free and explore exemptions under Sections 54, 54EC, and 54F?  Connect with Kanakkupillai today! Our expert team ensures seamless ITR filing and helps you understand the intricacies of these crucial sections for capital gain tax benefits.