Understanding Capital Gains | Impact of the Finance Act 2023
- Blog|Income Tax|News|
- 12 Min Read
- By Taxmann
- Last Updated on 26 May, 2023
Table of Contents
- Exemption from Capital Gains on Transfer of Interest in a JV by a PSC in Exchange of Shares in FC [Newly inserted Section 47(xx) and Section 49(2AI)]
- Taxation of Conversion of Gold into an Electronic Gold Receipt (EGR) or vice-versa
- Taxation of Market-Linked Debentures (MLD) and Debt Mutual Funds (DMF)
- Interest Claimed as Deduction Under Section 24(b) or Chapter VI-A will not Form Part of Cost of Acquisition
- Maximum Limit Introduced for Quantum of Deduction Under Section 54 and Section 54F
- The Cost of Acquisition of Self-generated Intangible Assets or Any Other Right shall be NIL
- Determining the Cost of Acquisition of a Unit of REIT/InVITs
1. Exemption from Capital Gains on Transfer of Interest in a JV by a PSC in Exchange of Shares in FC [Newly inserted Section 47(xx) and Section 49(2AI)]
- There is a transfer of a capital asset being an interest in a Joint Venture.
- Such capital asset is held by a public sector company.
- The transfer of interest is in lieu of allotment of shares in another company.
- Such another company is a foreign company incorporated outside India by the Govt of a foreign State in accordance with the laws of that State.
- No capital gains will be charged on such transfer.
- ‘Joint Venture’ means a business entity as notified by the Central Government in the Official Gazette.
- Section 49(2AI) provides that cost of interest in the joint venture shall be deemed to be the cost of acquisition of shares acquired by the public sector company (PSC) in such exchange.
2. Taxation of Conversion of Gold into an Electronic Gold Receipt (EGR) or vice-versa
- EGRs are a form of depository gold receipts which can be traded on stock exchanges. It is an electronic receipt issued by a SEBI-registered Vault Manager against the gold deposited
- As per amendment made in Explanation 1 below Section 2(42A) w.e.f. 01-04-2024, a new clause (hi) has been inserted according to which:
- In case of EGR issued in respect of gold deposited as per Section 47(viid), period of holding of physical gold by the assessee prior to conversion into EGR shall be included in the period of holding of EGR.
- Where EGR is exchanged into gold, the period of holding of gold will include the period of holding of such EGR prior to its conversion into gold.
- A new clause (viid) inserted in section 47 provides that any transfer of a capital asset, being conversion of gold into Electronic Gold Receipt issued by a Vault Manager, or conversion of
Electronic Gold Receipt into gold shall not be treated as transfer for the purposes of section
45. Thus, no capital gains will be charged on conversion or reconversion.
- This is an incentive for conversion of physical gold to EGR and vice versa both of which will be excluded from the ambit of capital gains tax.
- The expressions “Electronic Gold Receipt” and “Vault Manager” shall have the meanings respectively assigned to them in clauses (h) and (l) of sub-regulation (1) of regulation 2 of the SEBI (Vault Managers) Regulations, 2021 made under the SEBI Act, 1992.
- EGRs notified as ‘security’ u/s 2(h) of SCRA, 1956 like equity shares etc. to facilitate trading on stock exchanges.
- The cost of acquisition of EGR as per newly inserted Section 49(10) on conversion from gold by a Vault Manager shall be the cost of the gold to the assessee and, similarly, cost of acquisition of gold released on reconversion of EGR into gold shall be deemed to be the cost of the EGR in the hands of the assessee, provided the EGR/gold released against EGR became the property of the assessee as consideration of a transfer referred to in section 47(viid).
- These amendments will be effective from 01-04-2024 and shall apply from AY 2024-25 onwards.
3. Taxation of Market-Linked Debentures (MLD) and Debt Mutual Funds (DMF)
- MLDs are a type of debt instrument returns from which are linked to a market index or indices such as Nifty 50, Sensex etc.
- However, unlike other debt instruments, MLDs enjoyed preferred tax status for many years in terms of holding period and rates of tax.
- Being listed securities, MLDs held for over a year and giving rise to capital gains were taxed at a flat rate of 10% till March, 2023.
- From 01-04-2023 onwards, however, any gains arising on transfer or redemption of MLDs will be classified as STCG (irrespective of holding period and listing status) and taxed at the applicable slab rate for the investor (30% in case of HNIs).
- This amendment by way of insertion of a new section 50AA brings the much needed parity between MLDs and other standalone debt instruments like NCDs, bonds, FDs & Govt. securities.
- Section 50AA has been introduced as a special provision for computation of capital gains in case of MLDs.
- Section 50AA is applicable notwithstanding anything contained in Sections 2(42A) and 48.
- MLDs irrespective of the period of holding will be treated as short-term capital asset and gains arising therefrom will be treated as short-term capital gains.
- Units of a Specified Mutual Fund acquired on or after 01-04-2023 will also be treated as short-term capital asset and gains arising therefrom will be treated as short-term capital gains.
- Section 50AA thus provides the mechanism for computation of capital gains arising on transfer, redemption or maturity of MLDs/units of a Specified Mutual Fund.
- Only two items will be deducted from the full value of consideration received on transfer/redemption/maturity of MLDs:
- Cost of acquisition of the debenture &
- Expenditure incurred wholly and exclusively on transfer/redemption/maturity.
- ‘Specified Mutual Fund’ means a Mutual Fund where not more than 35% of total proceeds are invested in equity shares of domestic companies.
- Percentage of equity shareholding shall be computed with reference to the annual average of the daily closing figures.
- MLD means a security whose underlying principal component is in the form of a debt security and where the returns are linked to the market returns on other underlying securities or indices. It includes any security classified or regulated as MLD by SEBI.
- The capital gains arising on transfer of MLDs shall be taxed at applicable rates rather than @ 10%.
- Similarly, capital gains arising on transfer of units of DMFs shall be taxed as per normal slab rates.
- No benefit of indexation shall be available on transfer of MLDs and DMFs.
- No deduction of STT shall be allowed on transfer of MLDs and DMFs.
- This amendment takes effect from 01-04-2024 and shall apply from AY 2024-25 onwards.
4. Interest Claimed as Deduction Under Section 24(b) or Chapter VI-A will not Form Part of Cost of Acquisition
- This refers to the insertion of a new proviso to section 48(ii) w.e.f. 01-04-2024 in order to curb double deduction of interest claimed by taxpayers.
- Interest is paid by taxpayers on borrowed capital for acquiring, renewing or reconstructing a property.
- Such interest is claimed as deduction u/s 24(b) from income chargeable under the head ‘income from house property’.
- The deduction of interest payable on loan taken for house property is also claimed under Chapter VI-A.
- The interest so paid is also claimed as part of cost of acquisition or cost of improvement while computing capital gains on transfer of the house property.
- In order to prevent double deduction, a Proviso has been inserted after Section 48(ii) to the effect that if claim of deduction of interest is made u/s 24(b) or under Chapter VI-A, then such interest shall not form part of cost of acquisition or cost of improvement for the purpose of computing capital gains.
- This amendment is effective from 01-04-2024 and is applicable from AY 2024-25 onwards.
5. Maximum Limit Introduced for Quantum of Deduction Under Section 54 and Section 54F
- Exemption u/s 54 is available for investment of long-term capital gains arising on transfer of a residential house.
- Exemption u/s 54F is available for investment of net sale consideration arising on transfer of any other long-term capital asset.
- Such exemption is available when investment of LTCG/sale consideration is made in another residential house under certain conditions laid down in the two sections.
- So far there was no limit on amount of investment of LTCG/sale consideration made in the new residential house.
- However, an amendment has been made by the Finance Act, 2023 in both these provisions so that exemption under these sections will now be limited to Rs.10 crores even though LTCG/sale consideration may be more than that.
- Such limit is proposed to prevent claim of huge deductions being made by high net worth assessees by purchasing very expensive residential houses.
- Thus, where investment in the new asset is more than Rs.10 crores, then it shall be deemed to be Rs.10 crores.
- This amendment is effective from 01-04-2024 and is applicable from AY 2024-25 onwards.
- Where the new asset (cost of which is restricted to Rs.10 crores) is transferred within a period of three years of its purchase or construction, the exemption granted on the basis of cost of Rs.10 crores shall be charged to tax in the year of transfer of the new asset.
- For example, u/s 54, net sale consideration of transfer of house property in FY 2023-24 is say Rs.20 crores and long-term capital gains arising thereon is Rs.15 crores and investment in the new house is also, say, Rs.15 crores, no capital gains would have been charged under the pre-amended provisions.
- Under the amended provisions, however, maximum investment in the new asset is capped at Rs.10 crores. Therefore, capital gains will be charged on Rs.5 crores u/s 54.
- Similar calculation will be done if assessee deposits capital gains amount in CGAS account. Even if he deposits entire Rs.15 crores in CGAS account, exemption will be available only to the extent of Rs. 10 crores. Balance of Rs.5 crores will be charged to tax in the year of transfer of original asset.
- If only part amount lying in CGAS account is utilised in purchase/construction of the new asset and total utilisation is less than Rs.10 crores, then balance of capital gains will be charged to tax after expiry of three years.
- Similarly, u/s 54F where net sale consideration on transfer of long term capital asset (other than residential house) is say Rs.15 crores, long-term capital gains arising is say Rs. 9 crores and investment in the new asset is also Rs.15 crores, then LTCG in the year of transfer to be charged to tax will be calculated as under – (9/15) x 5 = Rs.3 crores
- If the new asset is transferred within three years, the balance of capital gains of Rs.6 crores will be charged in the year of transfer.
- If another house property is purchased within two years or constructed within three years, the amount of capital gains exempted (Rs.6 crores) will be charged in the year of acquisition of another asset.
- Similar calculation will be done, if net sale consideration is deposited in CGAS account.
- Where the assessee deposits entire net sale consideration of Rs.15 crores in CGAS account, the amount exceeding Rs.10 crores shall not be taken into account and the exemption will be restricted to only Rs.10 crores.
- Where investment is made in the new house and also deposit is made in CGAS account, the amount of investment/deposit in excess of Rs.10 crores shall be ignored and the exemption limit will be kept at Rs.10 crores.
- The cost of the new asset will be computed as under:-
- Under the present provisions of section 54, if exemption from capital gains is allowed on investment in new asset and such new asset is sold within three years of its acquisition, the cost of acquisition shall be taken as nil.
- Under the new provision in Section 54, the cost of the new asset, if transferred within three
years of acquisition will not be nil but will be the amount in respect of which capital gains is charged in the year of transfer of original asset. In the example given above (net sale consideration Rs. 20 crores, capital gains Rs. 15 crores, investment in new asset Rs. 15 crores, capital gains charged to tax Rs.5 crores and capital gains exempted Rs.10 crores) cost of the new asset will be Rs. 5 crores.
- Under the new provision in section 54, if the new asset is transferred after expiry of three years, the cost of the new asset will be Rs. 15 crores.
- Under the present provision of section 54F, if the new asset is sold within three years of
acquisition, amount of capital gains not charged will be taxed in the year of transfer. So also, under the new provision, the amount of exemption earlier allowed will be taxed in the year of transfer.
- Once amount of capital gains exempted is taxed, the cost of the new asset will be the cost at which it was purchased/acquired.
- Where the amount deposited in CGAS account is not utilised fully or partially for purchase/construction of a new residential house within the specified time, then the unutilized amount to the extent of Rs.10 crores will be charged as capital gains u/s 45 in the previous year in which the period of three years from the date of transfer of original asset expires.
6. The Cost of Acquisition of Self-generated Intangible Assets or Any Other Right shall be NIL
- This refers to a few significant amendments made by the Finance Act, 2023 in meaning of the expressions ‘cost of acquisition’ and ‘cost of improvement’ in certain cases as defined in section 55.
- In the absence of ‘cost of acquisition’ of certain assets, many legal disputes and controversies have arisen and the courts have taken the view that for taxability under the head ‘capital gains’, there has to be a definite cost of acquisition or it should be deemed to be nil under the Act.
- Since there is no specific provision which states that the cost of such self generated intangible assets (like goodwill) is nil, the chargeability of capital gains on transfer of such assets has failed to find favour with the Courts.
- Therefore, to define the term “cost of acquisition” and “cost of improvement” of such assets, the provisions of section 55(1)(b)(1) and section 55(2)(a) have been amended so as to provide that the “cost of improvement” or “cost of acquisition” of a capital asset being any intangible asset or any other right (other than those mentioned in the said sub-clause or clause, as the case may be) shall be ‘Nil’ for the purpose of computing capital gain.
- Consequently, as per section 55(1)(b)(1), “cost of improvement” in relation to a capital asset being goodwill or any other intangible asset of a business or a right to manufacture, produce or process any article or thing or right to carry on any business or profession or any other right shall be taken to be ‘nil’.
- Similarly, as per section 55(2)(a), for the purposes of sections 48 and 49, “cost of acquisition” in relation to a capital asset being goodwill of a business or profession or a trade mark or brand name associated with a business or profession or any other intangible asset or a right to manufacture, produce or process any article or thing or right to carry on any business or professions or tenancy rights or stage carriage permits or loom hours or any other right shall be taken to be ‘nil’ unless such intangible asset or right has been acquired for a price by the assessee/previous owner.
- These amendments take effect from 01-04-2024 and shall accordingly
apply in relation to AY 2024-25 and subsequent assessment years.
7. Determining the Cost of Acquisition of a Unit of REIT/InVITs
- REIT is Real Estate Investment Trust and InvIT is Infrastructure Investment Trust.
- Prior to 01-04-2020, the business trust included only listed REITs and InvITs. Units of listed REITs can be purchased on stock exchange and kept in a demat account.
- With effect from 01-04-2020, even unlisted REITs and InvITs are treated as business trust.
- The income of the business trust is governed by Section 115UA r.w.s. 10(23FC), 10(23FCA) and 10(23FD).
- Business trusts are subject to special tax regime under the I.T. Act, 1961. They have been accorded a pass-through status in respect of certain “Specified Incomes” distributed by them such as rent (only for REIT from properties owned), interest and dividend.
- Interest income or dividend income received by business trust from SPV is exempt in its hands u/s 10(23FC) but it is taxable in the hands of unit holder.
- Similarly, rental income received from REITs from properties owned by it is exempt in the hands of REIT but when it is distributed with the unit holders, it is taxed in the hands of unit holders.
- However, other interest income, other dividend income or rental income from SPV or other income or capital gains is taxable in the hands of business trust but is exempt in the hands of unit holders.
- As per section 55(2)(ac), the cost of acquisition of units of a business trust acquired before 01-02-2018 shall be higher of the following:-
- Cost of acquisition of such asset and
- Lower of-
- Fair market value (FMV) of such asset and
- Full value of consideration receivedor accruing as a result of transfer of units.
- The fair market value has been defined in Explanation (a) in Section 55(2)(ac). It is in
case of listed units-
- Highest price of the units quoted on the stock exchange on 31-01-2018.
- Where it is not so quoted on 31-01-2018, then highest price when quoted on any day
immediately preceding 31-01-2018.
- In case of unlisted units, FMV would mean net asset value of such unit as on 31-01-
- Where a shareholder transfers share of a special purpose vehicle (SPV)/Indian company to a business trust in exchange of units allotted to him by that trust, such transfer is treated as exempt in the hands of the shareholder u/s 47(xvii).
- Holding period of such units includes the period for which shares in SPV were held by the assessee.
- Where by virtue of section 47(xvii) units of a business trust become the property of the unit holder in consideration of transfer of shares of an Indian company (SPV) in which the business trust holds a controlling interest, the cost of acquisition of the units will be the cost of the shares in SPV held by him, as provided in Section 49(2AC).
- Besides ‘specified incomes’ referred to above, business trusts also distribute certain amounts to the unit holders which are generally in the nature of repayment of debt/loan advanced by the business trusts. The repayment of loan being a capital repayment does not get taxed either in the hands of the lender business trust or in the hands of the unit holders.
- The Finance Act, 2023 has plugged this loophole of double non-taxation by making amendments in provisions relating to capital gains and income from other sources with effect from AY 2024-2025.
- Explanation 1 below section 48(ii) inserted by the Finance Act, 2023 provides that the cost of acquisition of a unit of a business trust shall be reduced and shall be deemed to have always been reduced by any sum which is not taxed either in the hands of business trust or in the hands of unit holder either as Specified Income referred to in sections 10(23FC) and 10(23FCA) or as Specified Sum u/s 56(2)(xii).
- Explanation 2 clarifies that where the cost is determined under section 49 of the Act (applicable in case of exempted transfers), then cost of acquisition shall be reduced by such sums received either before or after the exempted transfer.
- Any “Specified Sum” received by a unit holder from business trust, other than those in the nature of Specified Income taxable in the hands of the unit holder or other income taxable in the hands of the trust, will be deemed to be an income in the hands of the unit holder taxable under the head ‘income from other sources’ [Section 56(2)(xii)].
- Any distribution received from a Business Trust for redemption of units (in excess of cost of acquisition) will be taxable under the head ‘income from other sources’ instead of ‘capital gains’.
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