Maximum Limit of Exemption under section 54 & 54F of Income Tax Act, 1961- Finance Bill 2023 proposal

Maximum Limit of Exemption under section 54 & 54F of Income Tax Act, 1961- Finance Bill 2023 proposal

The Finance Minister of India Smt. Nirmala Sitharaman presented the Union Budget 2023 on 01^st February 2023. The Government has proposed several changes in the Direct as well as Indirect Tax laws under this Budget. One such important proposal is an amendment in sections 54 & 54F of the Income Tax Act, 1961 restricting the limit of exemption against capital gain allowed under these sections. Let’s have a discussion of sections 54 & 54F in light of the proposed changes by the Finance Bill 2023 but before discussing the proposed amendment, we should also know about sections 54 & 54F:

Section 54 of the Income Tax Act, 1961

Section 54 of the Income Tax Act, 1961 allows an exemption to the taxpayers from tax on long-term capital gains if the sale proceeds of the long-term capital asset are invested as prescribed in the section. The following conditions should be satisfied for availing exemption u/s 54 of the Income Tax Act, 1961:

• Exemption u/s 54 is available only to an individual or HUF assessee
• Such an individual or HUF has derived a long-term capital gain on the transfer of a long-term capital asset (residential house property)
• For availing exemption from tax u/s 54, such individual or HUF shall acquire another residential house within a period of one year before or two years after the date of transfer of the old house or shall construct a new residential house within a period of 3 years from the date of transfer of the ole residential house.
• No exemption is allowed in respect of residential houses purchased or constructed outside India.
• Exemption under section 54 can be claimed only in respect of one residential house property. It simply means that if a person purchases or constructs two residential house properties simultaneously, the exemption under this section will be available in respect of investment made in one house property only.
• However, the above condition was relaxed in the Finance Act, 2020 where the taxpayers are given an option with effect from A.Y. 2021-22 to claim exemption u/s 54 for the investment made in two residential house properties subject to the condition that the amount of long-term capital gains do not exceed Rs. 2 crores. But this option could be exercised only once.

Section 54F of Income Tax Act, 1961

Section 54F is meant to allow exemption from tax on long-term capital gains arising on the transfer of a long-term capital asset (other than residential house property). Like section 54, the benefit of exemption under this section is available to individuals and HUF only. For availing exemption under section 54F, the assessee shall be required to invest sale proceeds from the transfer of long-term capital asset within a period of one year before or two years after the date of transfer of the original asset in the purchase of a new residential house or within a period of 3 years in the construction of a new residential house. However, the exemption u/s 54F is subject to certain riders but we are not discussing those riders as this article is basically meant to discuss the proposed amendment in the taxation laws in the Union Budget 2023.

Amendment proposed in section 54 and 54F

Presently there is no maximum limit or capping on the amount of exemption available under sections 54 and 54F except an option of purchase or construction of 2 residential houses. The primary objective of sections 54 and 54F of the Act was to mitigate the acute shortage of housing and to give impetus to house-building activity. However, in absence of any capping, it has been observed that claims of huge deductions are made by high net-worth assessees by purchasing very expensive residential houses. This practice has defeated the very purpose of these sections.

Therefore, the Union Budget 2023 has proposed a capping i.e. maximum limit of exemption available under sections 54 & 54F to Rs. 10 crores. Accordingly, it has been provided that if the cost of the new house purchased is more than Rs. 10 crores, the cost of the such house shall be deemed to be Rs. 10 crores.

Consequentially section 54(2) & 54F (4) which deals with the deposits in the capital gain account scheme have also been amended. It is proposed to insert a proviso to provide that the provisions of section 54(2) and 54F(4), for the purpose of deposit in the Capital Gains Account Scheme, shall apply only to capital gains or net consideration, as the case may be, upto Rs. 10 crores.

These amendments will take effect from 01^st April 2014 and accordingly apply for A.Y. 2024-25 and onwards.

The proposed Amendment in section 54 reads as follows:

The proposed amendment in section 54F is as follows:

To sum up, the Union Budget 2023 has brought a capping on the benefit available under sections 54 and 54F. Now, a taxpayer can not claim investment in new residential house property in excess of Rs. 10 crores for the purposes of sections 54 and 54F. However, the proposed change in these sections will not have any impact on the masses and is targeting the misuse of sections by HNI taxpayers only.

Disclaimer: The above article is meant only for educational purposes and does not carry any persuasive value. Therefore, the readers are advised to act in consultation with any professional before applying the information contained in this article. Taxwink is not responsible for any loss or damage caused to any person on account of any information contained in this article.

About Author: The article is contributed by CA Naveen Goyal who is a qualified Chartered Accountant with an experience of over 16 years in the field of Direct & Indirect Taxes. He is a prolific writer with a zeal to share knowledge on various issues pertaining to taxation laws in India. He can be reached at: ca.naveen80@gmail.com