Relaxation, clarification on capital gains tax needed in Budget 2020: EY

By Shalini Jain

With the annual budget around the corner, the expectations of individual tax payers are high. Given the recent reduction in corporate tax rates, the individual tax payers expect reduction in tax rates and relaxations coming their way as well.

Long-term capital gains on sale of equity shares and units of equity-oriented funds

The recent years have seen changes in capital gains taxation which has increased the tax burden of individual tax payers. For instance, the long-term capital gains (LTCG) exceeding Rs 1 lakh on sale of equity shares and units of equity-oriented funds on which Securities Transaction Tax (STT) is paid, which were earlier tax exempt, were brought to tax at 10% for transfers made on or after April 1, 2018.

To encourage small tax payers to invest in the stock market, the government may consider increasing the limit of Rs 1 lakh for taxing the long-term capital gains from transfer of such equity shares and units of equity-oriented funds.

Further, the government may also consider specifying a holding period (say 5 years) and if such shares or units are transferred after the specified holding period, the long-term capital gains may be considered as exempt.

Time limit for completion of construction under sections 54 and 54F

With regard to immovable property, a welcome step would be to enhance the time limit for construction of house property for availing exemption under sections 54 and 54F. Currently, the limit is to construct a new house within a period of three years from date of sale of the old one. However, practically, completion of construction in many cases takes longer.

In view of this, to avoid hardship to taxpayers due to loss of exemption due to construction not being completed, the time limit for construction of a house for availing exemption under section 54 and section 54F could be increased to 5 years. This is in line with the time limit provided under section 24 for deduction of interest on housing loan as amended by the Finance Act, 2016.

First year for calculating indexed cost of acquisition

Further, the determination of first year for calculating the indexed cost of acquisition for computing capital gains has been a subject matter of litigation over the years.

As per the combined reading of Explanation 1(b) to Section 2(42A) and Section 49(1) of the Income tax Act, 1961, the period of holding of the previous owner is to be considered in determining the period of holding of capital asset acquired by the tax payer through certain modes of acquisition such as gift or inheritance. Further as per Section 49(1), the cost of acquisition in relation to such assets is to be determined based on cost to the previous owner.

However, based on a literal reading of Explanation to Section 48, a view is possible that the Cost Inflation Index for indexation in case of such long-term capital assets is to be considered only from the date on which the tax payer first held the asset (and not the date on which the previous owner first held the asset).

While there are judicial precedents stating that the indexation benefit is available from the date on which the previous owner first held the asset, a clarification by the government and clear wording of the Explanation to Section 48 would prevent unnecessary litigation in this regard particularly at lower levels of tax authorities.

These are some of the expectations of the individual tax payers in relation to capital gains taxation that the government could consider in its Budget 2020.

(The author is Tax Partner, EY India.)

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