 "Budget clarifies, plugs loopholes in tax regime")
Two years earlier, Delhi resident Anand Singh sold his one-BHK (bedroom-hall-kitchen) flat for Rs 70 lakh. He was looking for a two-BHK, as his parents had moved in, too. Unfortunately, he wasn't able to find one of his liking. So, he decided to buy two different flats in one building, which he might later convert to one house unit. He got tax exemption for using the property sale proceeds of one house for two houses. This is in line with Section 54 or Section 54F of the Income Tax (I-T) Act.
However, if Singh were to do such a deal today, he would be unable to get this tax treatment. For, the Finance Bill 2014-15 has clarified that the exemption will be available only if the investment is made in one residential house only.
Explains Suresh Surana, founder of tax consultancy firm RSM Astute Consulting, "Earlier, Section 54 said if the sale proceeds of one house property were invested in a residential property, then tax exemption could be claimed. The I-T Act never clarified the meaning or definition of 'a residential house'. Courts interpreted it as also being more than one house property. However, it has now been clarified to mean 'one' residential property."
However, some court rulings say that adjoining houses if joined and used as one house can be called one residential unit provided they have one common entry or a single entry door, common kitchen and so on.
And given the new rule is applicable from April 1, 2014, it will be applied to all such transactions that took place in the first quarter for this financial year, warns Kuldip Kumar, executive director (tax & regulatory services) at PwC.
The Finance Bill 2014-15 has clarified many such I-T laws, especially pertaining to property transactions. Some examples:
Invest in properties in India only
For instance, according to Section 54 or Section 54F, a taxpayer can seek exemption when he sells his property and invests the sale proceeds in another residential property. Till now, the law was silent about the place or the area where the new property can be purchased. Hence, taking advantage of this, a large number of individuals would sell their property in India and invest the sale proceeds in a property or properties abroad. Or, they would buy one property in India and one abroad. "Now, an amendment has been brought about in the latest Finance Bill which says the exemption either under Section 54 or 54F will be available only if the investment is made in a residential house situated in India," says Srinivasan.
Invest only up to Rs 50 lakh in bonds
According to Section 54EC of the I-T Act, the capital gains arising from the transfer of a long-term capital asset - residential/commercial property, shares of unlisted firms, jewellery - should be invested within a period of six months, wholly or partly, in capital gains bonds. These should be notified by government undertakings, such as National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC). Taxpayers making this investment will be able to save tax in respect of the capital gains arising from the sale of a capital asset. Additionally, the law provided for the investment in capital gains bonds in one financial year to not exceed Rs 50 lakh.
However, experts say taxpayers whose capital gains arose after September of a financial year, meaning, those who sold their long-term capital asset after September, were able to save tax on more than Rs 50 lakh of investment. Here's how. Say a taxpayer sold a house property in January. He/she could make an investment of Rs 50 lakh in the capital gains bonds by March of the same financial year. And, he/she could invest the rest, up to Rs 50 lakh, before the six-month period ends. That means, by June of the next financial year. That is, saving tax on a total of Rs 1 crore. "However, this Budget has clarified that on the investment made by an assessee in the long-term specified asset, that is the capital gains bonds, the maximum deduction which can be availed is Rs 50 lakh in one financial year, in which the original asset or the assets are transferred and separate deduction cannot be claimed in the subsequent financial year," explains Surana.
New kind of other income
By an amendment to Section 56 of the I-T Act, it is now provided that any sum of money received as advance during the course of negotiation for transfer of a capital asset, if such sum is forfeited and negotiations finally do not result in the transfer of capital asset, then the same will be treated as income from other sources. Other income is taxed at slab rate.
Explains Srinivasan, "Say you plan to sell your house property. Once the deal is struck, say for Rs 1 crore, you take an advance from the buyer. Assume the advance is Rs 10 lakh. If the deal falls through and the advance amount isn't returned, it will be considered to be other income for the buyer." Till recently, if a person got money as advance for selling their residential property and if the said amount was forfeited due to some reason, then they were not required to pay tax on it.
NPS tax benefits extended to private sector employees
Under Section 80CCD, if a Central Government employee or any other employee who joined service on or after January 1, 2004, has made payments to a notified pension scheme, a tax deduction of ten per cent of his/her salary is allowed. This wasn't allowed for private sector employees.
"But now even private sector employees, irrespective of their date of joining the service, will get tax benefits for contribution to NPS," says Kumar.
However, if Singh were to do such a deal today, he would be unable to get this tax treatment. For, the Finance Bill 2014-15 has clarified that the exemption will be available only if the investment is made in one residential house only.
Explains Suresh Surana, founder of tax consultancy firm RSM Astute Consulting, "Earlier, Section 54 said if the sale proceeds of one house property were invested in a residential property, then tax exemption could be claimed. The I-T Act never clarified the meaning or definition of 'a residential house'. Courts interpreted it as also being more than one house property. However, it has now been clarified to mean 'one' residential property."
Also Read
Adds Rajesh Srinivasan, partner at Deloitte, Haskins & Sells LLP: "Even if you buy adjacent houses and use it as one unit, they will be two houses and, hence, need to be registered as two properties. Hence, it can't be considered to be one house property."
However, some court rulings say that adjoining houses if joined and used as one house can be called one residential unit provided they have one common entry or a single entry door, common kitchen and so on.
And given the new rule is applicable from April 1, 2014, it will be applied to all such transactions that took place in the first quarter for this financial year, warns Kuldip Kumar, executive director (tax & regulatory services) at PwC.
The Finance Bill 2014-15 has clarified many such I-T laws, especially pertaining to property transactions. Some examples:
Invest in properties in India only
For instance, according to Section 54 or Section 54F, a taxpayer can seek exemption when he sells his property and invests the sale proceeds in another residential property. Till now, the law was silent about the place or the area where the new property can be purchased. Hence, taking advantage of this, a large number of individuals would sell their property in India and invest the sale proceeds in a property or properties abroad. Or, they would buy one property in India and one abroad. "Now, an amendment has been brought about in the latest Finance Bill which says the exemption either under Section 54 or 54F will be available only if the investment is made in a residential house situated in India," says Srinivasan.
Invest only up to Rs 50 lakh in bonds
According to Section 54EC of the I-T Act, the capital gains arising from the transfer of a long-term capital asset - residential/commercial property, shares of unlisted firms, jewellery - should be invested within a period of six months, wholly or partly, in capital gains bonds. These should be notified by government undertakings, such as National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC). Taxpayers making this investment will be able to save tax in respect of the capital gains arising from the sale of a capital asset. Additionally, the law provided for the investment in capital gains bonds in one financial year to not exceed Rs 50 lakh.
However, experts say taxpayers whose capital gains arose after September of a financial year, meaning, those who sold their long-term capital asset after September, were able to save tax on more than Rs 50 lakh of investment. Here's how. Say a taxpayer sold a house property in January. He/she could make an investment of Rs 50 lakh in the capital gains bonds by March of the same financial year. And, he/she could invest the rest, up to Rs 50 lakh, before the six-month period ends. That means, by June of the next financial year. That is, saving tax on a total of Rs 1 crore. "However, this Budget has clarified that on the investment made by an assessee in the long-term specified asset, that is the capital gains bonds, the maximum deduction which can be availed is Rs 50 lakh in one financial year, in which the original asset or the assets are transferred and separate deduction cannot be claimed in the subsequent financial year," explains Surana.
New kind of other income
By an amendment to Section 56 of the I-T Act, it is now provided that any sum of money received as advance during the course of negotiation for transfer of a capital asset, if such sum is forfeited and negotiations finally do not result in the transfer of capital asset, then the same will be treated as income from other sources. Other income is taxed at slab rate.
Explains Srinivasan, "Say you plan to sell your house property. Once the deal is struck, say for Rs 1 crore, you take an advance from the buyer. Assume the advance is Rs 10 lakh. If the deal falls through and the advance amount isn't returned, it will be considered to be other income for the buyer." Till recently, if a person got money as advance for selling their residential property and if the said amount was forfeited due to some reason, then they were not required to pay tax on it.
NPS tax benefits extended to private sector employees
Under Section 80CCD, if a Central Government employee or any other employee who joined service on or after January 1, 2004, has made payments to a notified pension scheme, a tax deduction of ten per cent of his/her salary is allowed. This wasn't allowed for private sector employees.
"But now even private sector employees, irrespective of their date of joining the service, will get tax benefits for contribution to NPS," says Kumar.