The Finance Act, 2023, has amended some of the sections of the Income tax Act (Act) dealing with the computation of income under the heads “Capital Gains” and “Income From Other Sources.” These amendments come into force from A.Y.2024-25 (F.Y.2023-24) and will impact the computation of income for the A.Y.2024-25. In this article the effect of the above amendments are discussed.
The following amendments are made in the various sections of Act dealing with computation of Capital Gains. These amendments come into force from A.Y. 2024-25 (F.Y.2023-24)
1. Section 45(5A):
This section provides that the full value of the consideration received under the Redevelopment Agreement (Specified Agreement) is to be considered with reference to the year in which certificate of completion for the new project has been received from the Competent Authority. For this purpose, the Stamp Duty Valuation on the date of issue of the said completion certificate, including amount received in cash is considered as the full value of the consideration.
This section is now amended to provide that the Stamp Duty Valuation along with cash, cheque, or consideration received by any other means shall be considered as the full value of the consideration and Capital Gain shall be computed on that basis.
2. Sections 2(42A), 47 and 49:
Clause (vii d) is inserted in Section 47 to provide that any transfer by conversion of Gold into Electronic Gold Receipt (EGR) issued by a vault Manager or conversion of EGR into Gold will not be considered as a transfer and consequently will not be liable to Capital Gain Tax.
New Section 49(10) provides for the determination of the cost of acquisition of Gold or EGR which becomes property of an assessee on the conversion as stated in Section 47 (vii d). It is now provided that the cost of acquisition of EGR shall be deemed to be the cost of Gold in the hands of the person in whose name the EGR is issued. Similarly, cost of gold given for issue of the EGR shall be deemed to be the cost of EGR in the hands of such person.
Consequential amendment is made in Section 2(42A) to provide that the period of holding of EGR issued in respect of gold deposited shall include the period for which Gold was held prior to its conversion into EGR. Similarly, the period of holding of Gold released in respect of the EGR will include the period for which EGR was held by the assessee prior to its conversion into Gold.
3. Section 48:
This section has been amended to provide that the cost of Acquision or the cost of Improvement of an asset shall not include any amount of interest which has been claimed as deduction under Section 24(b) while computing income from House Property or under the provisions of Chapter VI A.
4. Section 50 AA :
This is a new section inserted in the Income tax Act. At present, long-term Capital gain on transfer of Market Linked Debentures, which are listed securities, and taxed at 10%, without Indexation.
“Market Linked Debentures” are defined as a security which has an underlying principal component in the form of a debt security and where the returns are linked to the market returns on the underlying securities or indices, and includes any security classified or regulated as a market linked debenture by SEBI.
New section 50AA provides that capital gain arising from transfer, redemption or maturity of these debentures shall be considered as short y Capital Gain, irrespective of their holding period. Securities Transaction Tax paid will not be allowed as deduction while computing this Capital Gain.
5. Sections 54 and 54F:
Both these sections provide for exemption from long term capital gain arising in the case of an Individual or HUF on reinvestment in purchase or construction of a Residential House during the specified period. Section 54 provides that if a Residential House is sold by an Individual or HUF and long term Capital Gain is reinvested, within specified period, in another Residential House, the assessee can claim exemption to this extent. Similarly, if an individual or HUF sells any other asset such as Commercial Property, Tenancy or Leasehold Rights, Shares etc., and the net consideration is invested in purchase or construction of a Residential House within the specified period, the assessee can claim exemption in respect of long term capital gain to this extent. Both these sections also provide that if the amount required to be reinvested in new Residential House cannot be so reinvested, the assesse can deposit the amount with a Bank under the Capital Gains Accounts Scheme before the due date for furnishing the Return of Income under Section 139(1). This amount can be used for purchase or construction of the new Residential House within the specified period.
Both the above sections are now amended to the effect that the amount invested in the new Residential House for claiming exemption under these sections cannot exceed Rs.10 Crores. Thus the amount invested in excess of Rs.10 Cr. will not qualify for exemption. Similarly, the amount deposited in the Capital Gaines Accounts Scheme in excess of Rs.10 Cr. will not be eligible for exemption. This amendment will affect persons with high net worth who wish to invest in large properties.
6. Section 55:
This section defines the terms “Cost of Acquisition” and “Cost of Improvement”. In relation to “Good will”, “Tenancy Rights” etc., which is not purchased or acquired for any consideration! it is provided in the section that the Cost of Acquisition or Cost of Improvement shall be taken as “NIL”. This section is now amended to provide that in respect of any “Intangible Asset” or any other “Rights” which are not acquired for consideration shall be taken as “NIL”.
The following amendments are made in various sections dealing with computation of “Income from Other Sources”. These amendments come into force from A.Y. 2024-25 (F.Y. 2023-24).
7. Sections 2 (24), 10 (10D) and 56(2) (xiii) – Life Insurance Policies:
The amendments in these sections will affect Life Insurance Polices (Other than ULIPS) issued on or after 1.4.2023 where the Annual Premium exceeds Rs.5,00,000/-. The effect of these amendments is as under:
(i) The exemption for proceeds of such policies under section 10(10D) will not be available.
(ii) In a case where the assessee has more than one such life policy, then the exemption for proceeds from such policy will be available only on the those policies where the aggregate amount of annual premium does not exceed Rs.5,00,000/- in any of the years during the term of any of those policies.
(iii) The proceeds of such policies, after deduction of the premiums paid (which have not been claimed as deduction under Chapter VI A earlier), will be treated as income under Section 2(24) (xvii d). Such income will be taxable as “Income from Other Sources”.
(iv) The proceeds from such policies received on the death of the insured person will continue to be exempt.
(v) The above provisions will not apply to Life Insurance Policies Issued before 1.4.2023 and will continue to be exempt as before.
8. Section 56(2) ( vii b):
This section provides that if a closely held company receives consideration for issue of shares to a “Resident” in excess of the Fair Market Value of the Shares, the excess amount so received is taxable as Income From Other Sources. This section is now amended to provide that if such excess amount is received from a “Non-Resident” for issue of shares by a closely held company, the company will have to pay tax on such excess amount.
9. Sections 9( 1) (viii) and 56(2) (x) :
Under the existing provisions of section 9 (1) (viii) any sum of money or property of the value exceeding Rs.50,000/- received by a non-resident without consideration or for inadequate consideration from a person Resident in India is taxable as income of a Non-Resident under Section 56 (2) (xi). Due to this, “Not Ordinarily Residents” receiving gifts from “Residents” were not paying tax on such amounts. To remedy this situation, section 9 (1) (viii) is now amended to provide that any gift received by a person who is “Not Ordinarily Resident” outside India from a person “Resident” in India will be liable to tax under section 56(2) (x).
10. To Sum Up:
Reading the above amendments it is evident that the persons with high net worth will have to pay more tax due to the cap of Rs.10 Cr. on exemption on reinvestment of capital gain on sale of Residential House and reinvestment of net consideration on sale of other assets under sections 54 and 54F. Further, the exemption on amount received on maturity of new life insurance policies, where Annual premium exceeds Rs.5 Lakhs, has been withdrawn and this will increase the tax burden of persons with high net worth. Further, the Government has made attempt to plug some of the loopholes noticed in actual implementation of some of the the provisions of the Income tax Act. Of course there are some amendments which are beneficial to the assessees.
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