BUDGET 2017 - More avenues to save Capital Gains Tax

Created on 12.02.2017 20:04:35
BUDGET 2017 - More avenues to save Capital Gains Tax

The Union Budget presented for financial year 2017-18 has made some landmark changes in the way capital gains on transfer and sale of property are taxed. The Budget proposes a number of changes in the capital gains taxation provisions in respect of land and building.

The existing provisions of the Income Tax Act provide for a concessional rate of tax and also indexation benefit for taxation of capital gains arising from the transfer of a long-term capital asset. To qualify to be a long-term asset, you are required to hold the asset for more than 36 months, subject to certain exceptions.For example, a holding period of 24 months has been specified for unlisted shares.

In order to promote the real estate sector and make it more attractive to investors, the Budget proposed to amend the act so as to reduce the period of holding from the existing 36 months to 24 months in case of property, land, building or both to qualify as a longterm capital asset. This amendment will take effect from April 1, 2017, and will apply in relation to the assessment year 2018-19, and subsequent years.

As of now, the holding period to consider gains from property to be long-term is three years. In case property is held for three years or more, it is treated as a long-term capital asset and is subject to long-term capital gains tax. This is much lesser than the normal tax rate.

Further, the base year for indexation is proposed to be shifted from April, 1981 to April, 2001 for all classes of assets including property. This again is a significant decision. It will reduce the capital gains tax liability significantly. It will also encourage mobility of assets.

Any profits from the sale of a capital asset will be deemed `capital gains'. A capital asset is any property, excluding goods held as stock-in-trade, agricultural land, and personal effects. Presently, if a property is held for less than 36 months, gains arising from selling it are treated as short-term capital gains (STCG) and taxed. It becomes long-term capital gains (LTCG) if the asset is held for 36 months or more.

So, there are two key points. One, the reduction in the holding period to 24 months. Two, shifting of the base year to April 2001 for the purpose of indexation.

As the holding period has been reduced, you don't have to wait for three years to sell a property if you want to. You can sell it after two years and get the benefits of long-term capital gains. Further, it also leads to property and capital circulating faster. You can use the gains so realized to invest in more properties. This helps you build a corpus to purchase a bigger property over a period of time.

For example, if you bought a property in April, 2016 you had to hold it till March, 2019 in order to treat it as a long-term capital asset. Now, this holding period is reduced and you only need to hold it till March, 2018. You are free to sell it anytime after that and you will get the benefits of long-term capital gains. So, as the holding period is reduced by one year, you can realize the funds on sale one year earlier too.

The base year for indexation being shifted from April, 1981 to April, 2001 is a significant decision too.

The value of the rupee today will not stay the same at a later date. Prices keep increasing due to inflation.In the Cost Inflation Index, issued by the Central Board of Direct Taxes, the figures keep changing every financial year. Inflation reduces an asset's value over a period of time. Indexation helps counter the erosion in the value of assets over time. You can increase the purchase price of the asset using the Cost Inflation Index. This shows the inflation-adjusted price in the year the asset is being sold.


The Budget has also indicated that the government proposes to extend the basket of financial instruments in which capital gains can be parked without payment of tax. Presently, there are limited options like purchase of capital gains bonds and deposits in capital gains saving accounts with specified banks.The existing provision provides that capital gains to the extent of Rs 50 lakh arising from the transfer of a long-term capital asset are exempt if you invest the funds in specified bonds within the specified time.


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