Budget 2023: Govt needs to consider simplifying LTCG Tax to claim Tax Exemption on LTCG under Section 54F

The Union Budget 2023 is expected to be populous, giving some benefits to farmers, boosting agricultural operations, and providing benefits to the rural masses. Finance Minister will continue to prioritize fiscal consolidation, domestic manufacturing, infrastructure spending, and job creation.

Apart from what we as a common man are expecting from the last budget of the current dominating government, the actual arises in our mind of ours is – What is the formula for success? Invest, Earn and Reinvest that money.

But can you reinvest something you have never received? The obvious answer is no. However, tax regulations may force you to reinvest the money you did not get; otherwise, you may be required to pay taxes.

It is difficult for the government to grant tax breaks because some sectors of the economy are still recuperating from Covid issues, but simplifying Long Term Capital Gain Tax may and should be addressed. We’re talking about Section 54F of the Income-tax Act of 1961.

What is Section 54F?

Section 54F of the Income-tax Act provides an exemption from having to pay capital gains tax under specified conditions. This exemption is available if a long-term capital asset (such as land, a building, or mutual fund units other than house property) is sold and the income are invested in the purchase or construction of a new house property within the specified timeframe given.

This means that if you have sold a property, you cannot claim an exemption from capital gains tax under section 54F. In contrast to other sections (such as section 54 or section 54EC), which require only capital gains to be reinvested, section 54F compels the taxpayer to reinvest the entire sale proceeds in a residential home.

Why is need to Simplify LTCG?

The condition of reinvesting the sale proceeds poses many practical difficulties for taxpayers. These challenges come from a discrepancy between the seller’s actual net sale amount and the net sale amount determined by tax laws. As a result of this difference, the actual net sale amount in the recipient’s hands is frequently less than the net sale amount as determined by income tax law.

And as the holding/specified period mentioned for LTCG for different asset classes is different and complex to understand for various instruments, this structure can and should be simplified to avoid usual irregularities and reduce litigation.

The above-mentioned differences are mainly due to three factors:

1) Minimum deemed amount.

2) TDS

3) Repayment of loan.

Minimum Deemed Amount

Section 50C of the Income-tax Act states that if an immovable property is sold for less than the stamp duty value (or ready reckoner rate or circle rate), the stamp duty value is recognised as the genuine sales consideration for capital gains purposes. The income tax department repeatedly attempts to invoke section 50C provisions in circumstances where an exemption under section 54F is asserted.

With an example, the implication can be understood. Assume the cost of land is Rs. 75, the real sale value is Rs. 100, and the reckoner rate is Rs. 150. The real gain is Rs. 25 (Rs. 100-Rs. 75), but the taxable capital gain is Rs. 75. (Rs. 150-Rs. 75). The income tax authority claims that in order to receive a tax exemption of Rs. 75, the taxpayer must invest Rs. 150. How should a taxpayer invest Rs. 150 if he receives Rs. 100?

For such a case, the Latin legal principle “Lex non-cogit ad impossibilia” applies. It says that “the law does not require the impossible.” Individuals should not be held accountable for failing to meet a commitment that is impossible to fulfil, according to this theory. The courts have also ruled that the income tax department’s objective is wrong. As a result, an express explanation in this regard would aid in the reduction of unnecessary litigation.

TDS Component

A salaried person understands the difference between gross and net income. Net income is defined as gross income less TDS, and tax is charged on gross income rather than net income after TDS. TDS is payable at the rate of 1% on the sale of immovable property if the sale value exceeds Rs 50 lakh.

To claim tax exemption under section 54F, a taxpayer must invest the entire sale proceeds in a new residential property, even if the actual sale proceeds are less due to TDS. As a relief measure, the TDS component may be clearly stated to have been invested in the new property.

Alternatively, investment in a new property without the TDS component could be regarded as adequate compliance for Section 54F tax exemption.

Repayment of Loan

Any repayment of a loan taken on the original asset being sold, from the sale proceeds of such asset, reduces the sale amount left in hand. . This makes it difficult for the taxpayer to invest the total sale amount in a new property. Budget 2023 should provide relief by allowing a reduction in the amount to be invested in a house property by the amount of loan repaid to the banks and financial institutions.

What Government can do?

The Recommendation and need of the hour is to go for Simplification of the tax code for better compliance.

To simplify the current ad hoc and complicated law, the government can bring all long-term assets under one regime. Stocks, bonds, gold, and real estate can be brought under a 15% regime with no indexation benefits and a 20% regime with indexation benefits, which means that if stocks are kept for 7 years, the effective rate will still be near 10%. Dividends on stock should remain tax-free because corporations already pay the dividend distribution tax. STT, which was introduced in place of LTCG, has served its purpose and should be phased out.