Taxpayers should remember that tax-saving exemptions on capital gains are available on long-term capital gains (LTCG) only

Income tax relief on Capital Gains Deposit Scheme: Can Budget 2025 offer clarity to taxpayers to easily claim exemption on LTCG of house sale? No exemptions are available if the capital gains are short-term in nature

Naveen Wadhwa

Vice-President, Taxmann

Rahul Singh

Rahul Singh, Senior Manager, Taxmann

When an individual sells an immovable property, the difference between the sale price and purchase cost, including any expenses, is treated as capital gains. To reduce income tax liability, the Income-tax Act provides exemptions under different sections such as Sections 54, 54F, etc., to taxpayers who reinvest the capital gains in specified ways. Taxpayers should remember that tax-saving exemptions on capital gains are available on long-term capital gains (LTCG) only. No exemptions are available if the capital gains are short-term in nature. For capital gains from the sale of a house property to be long-term, the house or immovable property must be sold after two years from the purchase or construction date.

How does exemption under Section 54, 54F work?

A taxpayer is granted a window of up to 3 years to reinvest LTCG in the new assets. Reinvestment of LTCG enables him to qualify for exemptions under Sections 54, 54F, and others. If the taxpayer does not adhere to this stipulated timeline for reinvestment, the Income-tax Department could face challenges in collecting the tax on the resulting capital gains. Therefore, taxpayers are mandatorily required to deposit the uninvested amount into the special Capital Gains Deposit Account in the authorised bank. This deposit ensures exemption even if the taxpayer fails to invest before the deadline for filing the income tax return. The amount invested in such deposit accounts is considered for computation of capital gains exemption.

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What is Capital Gains Deposit Account to save tax on LTCG?

The Capital Gains Deposit Account is a financial instrument designed to facilitate tax compliance and exemption of LTCG. This unique scheme allows taxpayers to deposit the uninvested amount in this special account, ensuring adherence to prescribed timelines for reinvesting in new eligible assets.

However, a question that often hounds taxpayers is what the deposit amount should be to claim exemption on LTCG. Whether the deposit amount should be based on the actual sale amount received by the seller (including TDS) or the stamp duty value determined under Section 50C of the Income Tax Act. This is because, at times, it happens that the sale value of the house (irrespective of TDS) is lower than the stamp duty value of the house.

Also read | Will government bring alternative to SGB scheme in Budget 2025?

What is Section 50C of the Income Tax Act to determine stamp duty of house?

Section 50C is a deeming provision under the Income Tax Act. It provides that if the amount on sale of land or a building is less than the stamp duty value set by the Stamp Valuation Authority, then the stamp duty value is deemed the actual amount for calculating capital gains.

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The difficulty arises when the Assessing Officer treats this deemed consideration as the amount to be deposited in the Capital Gains Deposit Account. The deeming provision to consider the higher amount for the computation of the capital gains should not be applied while determining the amount to be deposited in this special account.

This question is crucial, as deposits made under the special account directly impact the amount of capital gain exemptions available. Further, the taxpayers may encounter significant financial difficulties, potentially needing to secure additional funds beyond the actual sale proceeds they received on the sale transaction.

Let's understand this with a practical example.

A property with an overhead high-tension wire is sold for Rs. 60 lakhs. However, the stamp duty value of such property is Rs. 90 lakhs. According to Section 50C, the sale value for capital gains calculation is deemed to be Rs. 90 lakhs. The assessee deposits Rs. 60 lakhs in the special account, but the Assessing Officer contends that Rs. 90 lakhs should have been deposited to claim the complete exemption under Section 54 or 54F.

The current provisions of the Income-tax Act lack clarity on this matter.

What did different Judicial rulings say about depositing money in a Capital Gains Scheme Account?

The Delhi and Kolkata Tribunals have clarified the application of Section 50C in the context of the special deposit account and Section 54F exemption.

The Delhi ITAT held that deposits in the special account should be based on actual sale amount, as the deeming rule of Section 50C does not govern Section 54F exemptions.

The Kolkata ITAT also ruled that the deeming rule of Section 50C for computing the 'full value of consideration' is to be applied only to the capital gains calculations. This provision cannot be applied while computing exemption under Section 54F.

Expectations from Union Budget 2025 on Capital Gains Account Scheme

As Union Budget 2025 approaches, it is strongly recommended that the government remove this ambiguity in the Income-tax Act.
Taxpayers should not be compelled to deposit the amount in a special account based on the higher stamp duty value, which should never have been the legislative intent. A taxpayer cannot be forced to deposit the amount he never received.

The actual sale amount should serve as the foundation for the deposit in the special account. This will facilitate taxpayers' compliance with the provisions and enable them to claim capital gains exemptions without incurring excessive financial burdens.

The article is written by CA Naveen Wadhwa, Vice-president, Taxmann and CA Rahul Singh, Senior Manager, Taxmann.

(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