DIFFERENCES BETWEEN SECTION 54 AND SECTION 54F OF INCOME TAX ACT 1956.
Some may be wondering why this comparison of the two section is necessary, but however the Section 54F is so unique from all other exemption sections, that is why the comparison become useful.
Asset transferred.
54 Residential House property
54 F Transfer of a long term capital asset not being a residential house
2.
Type of Capital gain to claim exemption
54 & 54F Long term
3.
In what asset should the investment be made
54 & 54F Residential House Property
4.
How to invest
54 & 54F Purchase or construction
5.
Time limit for construction
54 & 54F 3 years from the date of transfer
6.
Time limit for purchase
54 & 54F 1 year before transfer or 2 years after transfer
7.
Amount of exemption
54 Amount of investment.
54F Proportional amount of investment to net consideration on transfer (See Note1 below)
8.
Under which situation there will be no tax on capital gain
54 When the investment is equal or greater than the amount of capital gain
54F When the investment is equal or greater than the amount of net consideration.
9.
If the amount is not invested before the date of filing return, what should be done?
54 & 54F Deposit in a Capital Gain Deposit Scheme in selected Banks and enclosed the copy of deposit with the return of income. (See Note 2)
10.
What is the consequence if the full deposit is not utilized?
54 & 54F The amount will be taxable in the year of default. (Either if there is withdrawal and the amount is not utilized or at the end of three year of transfer and there is no purchase or construction )
11.
Can the assessee hold another house property on date of transfer?
54 & 54F Yes. (But read the next point)
12.
Can the person hold more than one house property on the date of transfer other than the exempted asset (due to purchase one year before the date of transfer)?
54 Yes. The person can hold any number of house property on the date of transfer.
54F No. The person can hold only one house property other than the new exempted asset, otherwise he cannot claim exemption u/s 54F
13.
Can the person purchase a new house property within 1 year from the date of transfer or constructs a new house property from 3 years from date of transfer other than the exempted asset?
54 Yes
54 F No. If he does so, he will loss the exemption and he will be tax (for the exempted amount as long term capital gain) in the year such new asset is purchase or constructed
14.
What is the consequence if the exempted house property is transferred within three years of acquisition?
54 The amount of capital gain which is claimed exempted, will be reduced from the cost of acquisition of the new asset.
54F The amount of capital gain which is claimed exempted will be tax as such in the year the transfer took place.
15.
Nature of capital gain in case of the above default.
54 Short term
54F Long term.
Note 1. Amount of Exemption in case of Section 54F.
Amount of Exemption = Amount of investment * Capital gains
Net consideration
Note 2. The unutilised deposit amount under the Capital Gains Account Scheme, 1988 in the case of an individual who dies before the expiry of the stipulated period cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them�Circular : No. 743, dated 6-5-1996
Note 3. For those who do not know much about income tax.
When you sell/transfer certain assets (known as capital asset) such as immovable property, jewellery, share etc. and made a gain, you have to pay tax on capital gain.
Short term capital asset (for a layman) arise on sale/transfer of depreciable asset (used for business), any share, listed debentures (etc) held for 12 months or less, or any other asset held for 36 months or less. When you sell/transfer such asset, there shall be a short term gain or short term loss.
Long term capital asset are those asset which are not short term asset. On sale/transfer of such asset, long term capital gain or loss arises.
Short term capital gain is computed on deducting from the consideration (after any expenses), the cost of acquisition. Short term capital gain suffer normal rate of tax. Any short term capital loss can be set-off only against capital gain (both short term and long term).
For long term capital gain, the cost of acquisition is indexed using certain number which is notified (i.e. cost of acquisition is inflated, which is beneficial to the seller) and the same is deducted from the net consideration. However, you cannot index the cost of acquisition on certain bonds and debentures issued by the government. Long term capital gain do suffer tax at a flat rate of 20%. However, if the basic maximum limit which is exempted from tax (i.e. Rs. 50,000) is not exhausted from income from other head, long term capital gain can be reduced to that extent. Deduction under Chapter VI-A and Rebate u/s 88 is not allowed against long term capital gain. However, Rebate u/s 88B (Rs. 20000 for senior citizen) and u/s 88C (Rs. 5000 for ladies) can be claim [section 112] . Any long term capital loss can be set-off only against long term capital gain (not short term).
Loss (both short term and long term) can be carry forward for 8 years and set-off as explained above, if the return is filed before the due date of filing return.
In case long term capital gain arising out of transfer of listed securities or units, the assessee has another option. He can compare the amount of tax, with 10% of the gain which is made without indexing and choose the lower amount to pay tax. (i.e. the cost of acquisition is reduced from the net consideration and on such amount, 10% is applied. If such amount is less that the tax amount his tax will be restricted to the 10% of the gain) Refer Section 112.
Transfer not only includes sale but also lot of other transaction including conversion of a capital asset into stock-in trade, etc.
For certain transfer, capital gain does not arise like transfer by way of gift or inheritance (etc.). � the list is a long one.
On sale/transfer of long term asset there are certain exemptions from Section 54 to Section 54G. Above two of the popular exemption are given. In some case, the capital gains should be invested in certain bonds or shares within six months of transfer.
Note 4. A little advance level of capital gain. [section 45 and 46]
If a partner bring an asset into the books of his firm, it shall be treated as transfer in the hands of the partner. The amount entered in the books will be considered as the full value of consideration
Similarly, if the firm transfer any capital asset (except immovable property which is not registration in the name of the partners) to its partner, it will attract capital gains in the hands of the firm. The fair market value will be the amount of consideration.
However, in case of liquidation of the company, the company will not be chargeable to tax on transfer of its asset (not capital assets) to its shareholders. But the shareholders will be liable for capital gain, in the above case, after considering other provisions of the Income Tax Act.
In case of compulsory acquisition, where the compensation is determined for the first time, capital gain will be chargeable in the year of first receipt. In that year, the cost of acquisition and the cost of improvement shall be allowed as a deduction against the computed amount of compensation or consideration. In case of subsequent receipt due to enhancement, the capital gain will be chargeable in year of receipt of the compensation (and not determination of compensation) and the cost of acquisition and improvement will be taken as �nil�. Therefore, the return should be filed before the due date in case the assessment year of the first receipt (if there is a capital loss), so that any loss can be carry forward and set-off against any subsequent receipts (due to enhancements) or any future gain. If any amount of compensation is reduced in a subsequent year, the capital gain of the earlier year shall be recomputed accordingly.
If a capital asset is converted to stock-in-trade, the consideration will be the fair market value on date of conversion but such amount of tax shall be taxable in the year which the stock is sold.
Note 5. Some tips
Loss from other heads can be set-off against capital gains (both long and short term)
Proper tax planning should be done in order to save money in capital gains. Usually, a huge amount is involved in purchase and sale of assets. Therefore, proper planning should be done to save capital gain tax, stamp duty and also to buy and sell the asset at the price which is most beneficial.
Some may be wondering why this comparison of the two section is necessary, but however the Section 54F is so unique from all other exemption sections, that is why the comparison become useful.
Asset transferred.
54 Residential House property
54 F Transfer of a long term capital asset not being a residential house
2.
Type of Capital gain to claim exemption
54 & 54F Long term
3.
In what asset should the investment be made
54 & 54F Residential House Property
4.
How to invest
54 & 54F Purchase or construction
5.
Time limit for construction
54 & 54F 3 years from the date of transfer
6.
Time limit for purchase
54 & 54F 1 year before transfer or 2 years after transfer
7.
Amount of exemption
54 Amount of investment.
54F Proportional amount of investment to net consideration on transfer (See Note1 below)
8.
Under which situation there will be no tax on capital gain
54 When the investment is equal or greater than the amount of capital gain
54F When the investment is equal or greater than the amount of net consideration.
9.
If the amount is not invested before the date of filing return, what should be done?
54 & 54F Deposit in a Capital Gain Deposit Scheme in selected Banks and enclosed the copy of deposit with the return of income. (See Note 2)
10.
What is the consequence if the full deposit is not utilized?
54 & 54F The amount will be taxable in the year of default. (Either if there is withdrawal and the amount is not utilized or at the end of three year of transfer and there is no purchase or construction )
11.
Can the assessee hold another house property on date of transfer?
54 & 54F Yes. (But read the next point)
12.
Can the person hold more than one house property on the date of transfer other than the exempted asset (due to purchase one year before the date of transfer)?
54 Yes. The person can hold any number of house property on the date of transfer.
54F No. The person can hold only one house property other than the new exempted asset, otherwise he cannot claim exemption u/s 54F
13.
Can the person purchase a new house property within 1 year from the date of transfer or constructs a new house property from 3 years from date of transfer other than the exempted asset?
54 Yes
54 F No. If he does so, he will loss the exemption and he will be tax (for the exempted amount as long term capital gain) in the year such new asset is purchase or constructed
14.
What is the consequence if the exempted house property is transferred within three years of acquisition?
54 The amount of capital gain which is claimed exempted, will be reduced from the cost of acquisition of the new asset.
54F The amount of capital gain which is claimed exempted will be tax as such in the year the transfer took place.
15.
Nature of capital gain in case of the above default.
54 Short term
54F Long term.
Note 1. Amount of Exemption in case of Section 54F.
Amount of Exemption = Amount of investment * Capital gains
Net consideration
Note 2. The unutilised deposit amount under the Capital Gains Account Scheme, 1988 in the case of an individual who dies before the expiry of the stipulated period cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them�Circular : No. 743, dated 6-5-1996
Note 3. For those who do not know much about income tax.
When you sell/transfer certain assets (known as capital asset) such as immovable property, jewellery, share etc. and made a gain, you have to pay tax on capital gain.
Short term capital asset (for a layman) arise on sale/transfer of depreciable asset (used for business), any share, listed debentures (etc) held for 12 months or less, or any other asset held for 36 months or less. When you sell/transfer such asset, there shall be a short term gain or short term loss.
Long term capital asset are those asset which are not short term asset. On sale/transfer of such asset, long term capital gain or loss arises.
Short term capital gain is computed on deducting from the consideration (after any expenses), the cost of acquisition. Short term capital gain suffer normal rate of tax. Any short term capital loss can be set-off only against capital gain (both short term and long term).
For long term capital gain, the cost of acquisition is indexed using certain number which is notified (i.e. cost of acquisition is inflated, which is beneficial to the seller) and the same is deducted from the net consideration. However, you cannot index the cost of acquisition on certain bonds and debentures issued by the government. Long term capital gain do suffer tax at a flat rate of 20%. However, if the basic maximum limit which is exempted from tax (i.e. Rs. 50,000) is not exhausted from income from other head, long term capital gain can be reduced to that extent. Deduction under Chapter VI-A and Rebate u/s 88 is not allowed against long term capital gain. However, Rebate u/s 88B (Rs. 20000 for senior citizen) and u/s 88C (Rs. 5000 for ladies) can be claim [section 112] . Any long term capital loss can be set-off only against long term capital gain (not short term).
Loss (both short term and long term) can be carry forward for 8 years and set-off as explained above, if the return is filed before the due date of filing return.
In case long term capital gain arising out of transfer of listed securities or units, the assessee has another option. He can compare the amount of tax, with 10% of the gain which is made without indexing and choose the lower amount to pay tax. (i.e. the cost of acquisition is reduced from the net consideration and on such amount, 10% is applied. If such amount is less that the tax amount his tax will be restricted to the 10% of the gain) Refer Section 112.
Transfer not only includes sale but also lot of other transaction including conversion of a capital asset into stock-in trade, etc.
For certain transfer, capital gain does not arise like transfer by way of gift or inheritance (etc.). � the list is a long one.
On sale/transfer of long term asset there are certain exemptions from Section 54 to Section 54G. Above two of the popular exemption are given. In some case, the capital gains should be invested in certain bonds or shares within six months of transfer.
Note 4. A little advance level of capital gain. [section 45 and 46]
If a partner bring an asset into the books of his firm, it shall be treated as transfer in the hands of the partner. The amount entered in the books will be considered as the full value of consideration
Similarly, if the firm transfer any capital asset (except immovable property which is not registration in the name of the partners) to its partner, it will attract capital gains in the hands of the firm. The fair market value will be the amount of consideration.
However, in case of liquidation of the company, the company will not be chargeable to tax on transfer of its asset (not capital assets) to its shareholders. But the shareholders will be liable for capital gain, in the above case, after considering other provisions of the Income Tax Act.
In case of compulsory acquisition, where the compensation is determined for the first time, capital gain will be chargeable in the year of first receipt. In that year, the cost of acquisition and the cost of improvement shall be allowed as a deduction against the computed amount of compensation or consideration. In case of subsequent receipt due to enhancement, the capital gain will be chargeable in year of receipt of the compensation (and not determination of compensation) and the cost of acquisition and improvement will be taken as �nil�. Therefore, the return should be filed before the due date in case the assessment year of the first receipt (if there is a capital loss), so that any loss can be carry forward and set-off against any subsequent receipts (due to enhancements) or any future gain. If any amount of compensation is reduced in a subsequent year, the capital gain of the earlier year shall be recomputed accordingly.
If a capital asset is converted to stock-in-trade, the consideration will be the fair market value on date of conversion but such amount of tax shall be taxable in the year which the stock is sold.
Note 5. Some tips
Loss from other heads can be set-off against capital gains (both long and short term)
Proper tax planning should be done in order to save money in capital gains. Usually, a huge amount is involved in purchase and sale of assets. Therefore, proper planning should be done to save capital gain tax, stamp duty and also to buy and sell the asset at the price which is most beneficial.