Trying to use Capital Gains Scheme Account to cut LTCG tax on indexed gains from 20% to 12.5%? It won't work Otherwise, the indexed long-term capital gains will be taxed at 20% instead of 12.5%
Dr. Vinod K. Singhania
Leader, Research & Advisory, Taxmann
Naveen Wadhwa
Vice-President, Taxmann
There is some confusion after the recent Union Budget, suggesting that a tax arbitration opportunity has come up for those who had transferred a long-term capital asset such as land, building or house property before July 23, 2024. This untenable theory suggests that if a taxpayer deposits long-term capital gains or sales consideration, post indexation, in the capital gains scheme account and does not utilise the same till the limitation period (of the account) expires, he can reduce the tax liability from 20% to 12.5%. Here's how this is supposed to happen.
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} Two things to note at the start: (i) This opportunity is argued to exist only for those people who had sold property before July 23, 2024, but have not yet paid the capital gains tax on the sale; (ii) Also, remember that for property bought and sold before July 23, 2024, the tax rules for capital gains remain unchanged i.e. long term capital gains (LTCG) would be taxed at 20% after indexation of the cost of acquisition.
This means that if a property is held for more than 24 months and is transferred on or before July 22, 2024, the seller can deduct the indexed cost of acquisition while computing the long-term capital gains (LTCG). The indexation benefit inflates the cost of acquisition to nullify the impact of inflation over the years since the seller acquired such property. This indexation is done based on the cost inflation index (CII) which the government notifies every year. The LTCG so computed in this manner is taxable at 20%.
The indexation benefit is allowed under the second proviso to Section 48, and the tax rate is prescribed under Section 112. Both these provisions have undergone significant changes from July 23, 2024. Consequently, where property is transferred on or after 23rd July 2024, the indexation benefit will not be allowed, and the tax rate shall be reduced to 12.5%.
Before we discuss further, there are two more concepts one needs to understand.
First, a deduction is allowed under Sections 54 to 54GB for investment rollover. These provisions allow taxpayers to reduce or nullify the capital gains tax (on the sale of property) if they invest some or all of the sale consideration/capital gains in new assets on or before the due dates. The most popular deductions are under Section 54 (requiring to invest capital gains) and Section 54F (requiring to invest sale consideration) for investment in a new house property.
Second, the capital gains scheme account. This special account is a stop-gap arrangement for those who wish to claim the deductions under Sections 54 and 54F but cannot invest by the due date to file the income tax return (i.e., usually July 31). Therefore, a taxpayer can deposit the amount in this special account and claim a deduction under Sections 54 or 54F. However, where the amount deposited in this special account is not utilised in purchasing the residential house within the given time limit, the unutilised deposit is deemed long-term capital gain of the relevant previous year in which the time limit (of the account-typically 2/3 years) expires. And, this is the ground for calling it an arbitration opportunity.
The capital gains from the sale of the long-term capital assets before July 23, 2024, will be computed after the indexation benefit, and 20% will be the tax rate. If a taxpayer deposits the sale consideration (For Section 54F)/capital gains (For Section 54) in the special account, he will not pay any tax on such capital gains in the year of transfer of such asset. If he does not use this money for a new residential house (within 2 years/3 years as specified in section 54/54F), the capital gains not charged to tax in that year will now be deemed taxable in the year in which the time limit of 2/3 years expires (or when the amount is withdrawn from the deposit account before purchasing/constructing a new house). Now a question arises, whether such deemed capital gain (if it arises during the financial year 2024-25 or subsequently) will be taxable at 12.5%?
A clarification from the income tax department will be helpful in such a case. However, we have two grounds supporting the argument that even for financial years after 2024-25, such deemed capital gain will be taxable at the rate of 20% instead of the new LTCG tax rate of 12.5%.
First, the unutilised amount is charged to tax as capital gains because of a deeming provision and not because of the transfer of a capital asset.
Second, the 2024 budget reduces the tax rate to 12.5%, which applies only if the transfer takes place on or after July 23, 2024.
In other words, the taxability does not arise due to the transfer of any capital asset but due to the withdrawal of the deduction allowed in earlier years under Sections 54 or 54F in respect of the transfer of capital asset prior to July 23, 2024.
In the following illustration, we have computed the tax liability if one sells the property before the cut-off date of July 23, 2024, and the limitation period to reinvest the amount expires on or after July 23, 2024.
Mr. A bought a house worth Rs. 25 lakh in January 2016 and he sold it on August 1, 2022 for Rs. 1 crore. He deposited Rs. 70 lakhs in the capital gains special account in July 2023. He could not buy the house before the limitation period expired on July 31, 2025. His tax liability due to withdrawal of deduction under Section 54 shall be calculated as follows. The CII for 2015-16 and 2022-23 were 254 and 331, respectively.
Particulars
Amount
Full value of consideration [A]
Rs. 1,00,00,000
Less: Indexed cost of acquisition [Rs. 25 lakhs * 331/254] [B]
Rs. 32,57,874
Long-term capital gains [C = A – B]
Rs. 67,42,126
Amount deposited in the special account [D]
Rs. 70,00,000
Deduction under Section 54 [E = Lower of C and D]
Rs. 67,42,126
Taxable long-term capital gains [F = C – E]
Nil
Tax saved due to deduction under Section 54 [G = E * 20%]
Rs. 13,48,425
Amount remained unutilised until 31st July 2025 [H]
Rs. 67,42,126
Long-term capital gains taxable in the previous year 2025-26 due to withdrawal of deduction under Section 54 [I]
Rs. 67,42,126
Tax on long-term capital gains in the previous year 2025-26 [J = I * 20%] (in this case, tax for the assessment year 2026-27 cannot be calculated at the rate of 12.5% because originally the asset was transferred prior to 23rd July 2024
Rs. 13,48,425
Net tax saving [K = G – J]
Nil
It is strongly recommended that one should not claim that the capital gains deemed taxable in a financial year due to withdrawal of deduction (due to non-utilizing the deposit) are taxable at 12.5% if the capital asset was transferred before July 23, 2024. If one does so, the income tax department may disallow the claim and slap a penalty for misreporting of income.
(The article is written by Dr. Vinod K. Singhania, Leader, Research & Advisory, Taxmann and CA Naveen Wadhwa, Vice President, Research & Advisory, Taxmann.) #sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
