Understanding income tax - capital gains - final part

Objectives & Agenda :

To analyse and interpret the provisions of the Income-tax Act relating to computation and chargeability of Capital Gains. In this Webinar we shall look at various exemptions available under Capital Gains by way of exempting capital gains in specific cases or for specific persons and exemptions based on specified investments. We will also look at provisions of capital gains in case of non-residents. Finally, the Webinar will touch upon relevant Judicial Precedents.

1. Understanding Income-tax – Capital Gains – Final Part CA. Divakar Vijayasarathy

2. Credits and Acknowledgments V Thirumal CA Jugal Gala

3. Legends used in the Presentation BBDT Buy-back Distribution Tax COA Cost of Acqusition FII Foreign Institutional Investors FY Financial Year GDR Global Depository Receipts HUF Hindu Undivided Family IFSC International Financial Services Centre IFHP Income from house property LTCG Long-term Capital Gains PY Previous Year RBI Reserve Bank of India RDB Rupee Denominated Bond SEZ Special Economic Zone STCG Short-term Capital Gains TT Telegraphic Transfer

4. Presentation Schema

5. Sections Covered Sec Description Exemptions based on Investments 54 Gains from Residential House Property invested in Residential House Property 54B Agricultural Land 54D Land or Building for Industrial Undertaking 54EC Investment in Certain Bonds 54EE Investment in Units of Specified Fund 54F Gains from any asset and Investment in Residential House 54GA Shifting of Industrial Undertaking from Urban Area 54GB Transfer of Residential Property and Investment in business Income based Exemptions 10 Exemptions for Specified Organisations Exemptions for Specified Funds and Trust Exemptions for Shares and Securities Miscellaneous Exemptions Capital Gains for Non-residents 48 Computation of Capital Gains 47 Exempted Transfers 111A, 112, 112A Rates of Tax

6. Exemptions Based on Investments

7. Comparative Analysis for Exemption under Sec 54, 54B and 54D Particulars Sec 54 Sec 54B Sec 54D Assessee Individual/HUF Individual/HUF Any person Nature of Capital Asset Long-term Short-term/long term Short-term/long term Eligible asset Residential House property the income of which is chargeable under the head "Income from house property" Urban agricultural land used for agricultural purposes by the individual or his parents or HUF for 2 years prior to transfer Land or building forming part of an industrial undertaking used for business purposes for 2 years prior to compulsory acquisition by Government Asset to be Acquired Only 1 Residential house property situated in India. Vide Finance Act, 2019 , assessee shall have an option to invest in 2 residential houses situated in India if the capital gain does not exceed 2 crores. This option can be availed only once in a lifetime. Agricultural land (rural or urban) Land or building for shifting or re-establishing the said undertaking or setting up another industrial undertaking Time limit for acquiring a new asset Purchase: 1 year prior or 2 years from the date of transfer Construction: 3 years from the date of transfer 2 years from the date of transfer 3 years from the date of transfer Amount exempt Investment or Amount of capital gains whichever is less Holding period for the new asset 3 years from the date of acquisition

8. Contd. Consequence if new asset is transferred within holding period Such asset shall be a short term capital asset and its cost of acquisition shall be reduced by the exemption allowed earlier under this Sec i.e. it would be considered as nil. Benefit under Sec 54H Available for all 3 Secs Scheme of Deposit Available for all 3 Secs Return Filing Mandatory if before claiming exemption under above Sec, the total income is more than the basic exemption limit (Amendment of Union Budget 2019) Sec 54 applies to transfer of a residential property, the income of which is chargeable to Income from house property (IFHP). Therefore, residential properties, which are not chargeable to Income from house property, shall not be eligible for exemption under Sec 54 Sec 54D exemption shall be allowed only if the new asset is purchased or constructed for the purpose of specified activities mentioned. Thus, if the purpose of purchase or construction differs from activities mentioned above, exemption under Sec 54D shall not be allowed

9. Scheme of Deposit and Benefit under Sec 54H This is due to the fact that where an asset is compulsorily acquired; it takes considerable time for the assessee to receive the compensation from the authorities and the chargeability provisions relating to capital gains triggers from the time of compulsory acquisition Benefit under Sec 54H Capital Gains Deposit Scheme (Scheme of Deposit)

10. Investment in Certain Bonds - Sec 54EC Particulars Description Assessee Any assessee Eligible capital asset Any long term capital asset being land or building or both Asset to be Acquired Bonds of National Highway Authority of India (NHAI) or Rural Electrification Corporation Ltd (RECL) or any other bonds notified by Central Government, redeemable after 5 years Time limit for acquiring a new asset Within 6 months from the date of transfer Amount exempt Investment or Capital gains whichever is less Monetary Limit for Exemption Maximum Rs 50 lakhs Holding period for the new asset 5 years from the date of acquisition Note: No loan must be taken against the security of bonds or bonds should not be converted for the period of 5 years, else the exemption provided shall be withdrawn Consequence if new asset is transferred within holding period Exempted capital gains shall be withdrawn and charged to taxation as income in the year of transfer as LTCG. However where the original asset is a depreciable asset under Sec 50, exemption shall be withdrawn as STCG. Non-allowability of deduction Once the investment in bonds are eligible for exemption under this Sec, no deduction under Sec 80C shall be allowed for the said investment made Capital Gains Deposit Scheme Not available Return Filing Mandatory if before claiming exemption under above Sec, the total income is more than the basic exemption limit (Amendment of Union Budget 2019)

11. Investment in Units of Specified Fund - Sec 54EE Particulars Description Assessee Any assessee Eligible capital asset Any long term capital asset Asset to be acquired Units of fund as notified by Central Government in this behalf before 01.04.2019 Time limit for acquiring a new asset Within 6 months from the date of transfer Amount exempt Investment or Capital gains whichever is less Monetary Limit for Exemption Maximum Rs 50 lakhs Holding period for the new asset 3 years from the date of acquisition Note: No loan must be taken against the security of these units for 3 years, else the exemption provided shall be withdrawn Consequence if new asset is transferred within holding period Exempted capital gains shall be withdrawn and charged to taxation as income in the year of transfer as LTCG. However where the original asset is a depreciable asset under Sec 50, exemption shall be withdrawn as STCG. Scheme of Deposit Not available

12. Investment in Residential House - Sec 54F Particulars Remarks Applicability Individual or HUF Assets to be transferred Any long term capital asset other than residential house New asset in which investment to be made for exemption One residential house in India Time period for making the investment For Purchase: 1 year before or two years from the date of transfer For Construction: 3 years from the date of transfer Quantum of deduction Capital Gains * Amount Invested/Net Consideration Net Consideration means full value of consideration less the expenses incurred in relation to transfer. Lock-in period The new asset shall not be transferred within a period of 3 years from the date of purchase or construction. Benefit of Capital Gains Deposit Scheme Available Return Filing Mandatory if before claiming exemption under above Sec, the total income is more than the basic exemption limit (Amendment of Union Budget 2019)

13. Contd. Conditions Consequences of violation New asset is sold within a period of 3 years from the date of purchase or construction Exemption shall be withdrawn and taxable as LTCG in the year of transfer of new asset. STCG shall additionally be computed on the transfer of the new asset Assessee purchases or constructs any residential house chargeable under IFHP within 2 or 3 years Exemption shall be withdrawn and taxable as LTCG in the year of violation Amount deposited in Capital Gains Deposit Scheme is not utilised for the purpose of investment or utilised partially Difference between exemption earlier and amount of exemption had the unutilised amount been utilised for the purpose of purchasing new residential house, Shall be charged to tax as capital gains (nature same like the erstwhile exemption) in the year in which the allowed time period expires

14. Shifting of Industrial Undertaking from Urban Area — Sec 54G and 54GA Particulars 54G 54GA Assessee Any assessee Nature of asset Short term/long term Eligible asset Machinery or plant or land & building or any rights in land or building, used in the business of industrial undertaking, transferred in order to shift an industrial undertaking from an urban area to an area other than urban area Machinery or plant or land & building or any rights in land or building, used in the business of industrial undertaking, transferred in order to shift an industrial undertaking from an urban area to SEZ in any area Asset to be acquired Purchase of new machinery or plant for business purpose in SEZ where industrial undertaking is shifted Purchase of Land and Building for business purpose in SEZ where industrial undertaking is shifted Construction of Buildings for business purpose in SEZ where industrial undertaking is shifted Payment of expenses as may be specified by Central Government Time limit for acquiring a new asset 1 year prior to or 3 years from the date of transfer Amount exempt Investment or amount of capital gains whichever is less Holding period for the new asset 3 years from the date of acquisition

15. Contd. Consequence if new asset is transferred within 3 years Such asset shall be a short term capital asset and its cost of acquisition shall be reduced by the exemption allowed earlier under this Sec i.e. it shall be considered as nil Scheme of Deposit under Capital Gains Deposit Scheme Available Consequences if amount not utilised for the specified investment Amount not utilised shall be charged to capital gains in the year in which period of 3 years from the date of transfer of original asset expires Return Filing Mandatory if before claiming exemption under above Sec, the total income is more than the basic exemption limit (Amendment of Union Budget 2019) Urban area Means any such area within the limits of a municipal corporation or municipality as the Central Government may, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, by general or special order, declare to be an urban area for the purposes of this sub-Sec. Special Economic Zone Shall mean any specified area notified by Central Government as SEZ, including Free Trade and Warehousing Zone

16. Transfer of Residential Property and Investment in business - Sec 54GB Particulars 54GB Eligible assessee Individual or HUF Eligible capital asset Residential property being a house or plot of land Nature of the capital asset Long term capital asset Eligible investment and eligible company Net consideration (full value of consideration less transfer expenses) to be invested in equity shares of an eligible company. Eligible company means a company which fulfils all the following conditions, namely:— Company incorporated in India during the period from the 1st day of April of the FY of transfer till due date for filing return of Income Engaged in the business of manufacture of an article or a thing or in an eligible business Assessee has more than 50% share capital or more than 50% voting rights after the investment under this Sec (Amendment by Union Budget 2019) and Company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 OR It is an eligible start-up.

17. Contd. Eligible start up and eligible business "Eligible business" means a business carried out by eligible start-up engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation; "Eligible start-up" means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions, namely:— (a) it is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2021; (b) the total turnover of its business does not exceed 25 crore rupees in the FY of transfer; and (c) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government; Date within which transfer of the residential property is to be made Within 31st March 2017; however, in case of investment in eligible start up, the said date shall be extended to 31st March 2021 (Amendment by Union Budget 2019) Time limit for investment by eligible assessee – Sec 54GB(1)(ii) On or before the due date for filing return of income of eligible assessee under Sec 139(1). Amount of exemption Capital gains/Net sale consideration * Amount invested in new asset by eligible company. Net Consideration means full value of consideration less the expenses incurred to effect the transfer.

18. End Use of Amount Invested by the Eligible Assessee It shall be noted that cost of new asset shall be the amount utilised for purchase of new asset + amount invested in Capital Gains Deposit Scheme The company should, within one year from the date of subscription in equity shares by the assessee, utilise the amount for purchase of new asset For an eligible start up being a technology driven start-up, the new asset shall include computers or computer software

19. Other Conditions Holding period for the new asset & equity shares The eligible assessee shall hold equity shares for a minimum period of 5 years. The eligible company shall be required to hold the “new asset” for a minimum period of 5 years from the date of its acquisition except for computer or computer software held by technology driven start-up (Amendment by Union Budget 2019) Consequence if new asset or equity shares is transferred within the lock-in period For the assessee – exempted LTCG shall be chargeable to tax in the year of transfer/violation For the eligible company – capital gains on transfer of depreciable assets under Sec 50 shall be levied in the year of transfer. Benefit under Sec 54H Not applicable Scheme of Deposit - Sec 54GB(2) Available to the eligible company and not to the eligible assessee. However, the due date of return filing of income to be considered for investing in Capital Gains Deposit Scheme would be that of eligible assessee claiming exemption and not of eligible company. Consequences if amount not utilised or utilised partially Difference between exemption earlier and Amount of exemption had the unutilised amount been utilised for purchasing new asset, Shall be charged to tax as capital gains (nature same like the erstwhile exemption) in the year in which the time period to make investment expires Return Filing Mandatory if before claiming exemption under this Sec, the total income is more than the basic exemption limit (Amendment of Union Budget 2019)

20. Income Based Exemptions

21. Specified Organisations Section Exemption 10(20) Capital gains income of Local Authority (Panchayat, Municipality, Municipal Committee, District Board or Cantonment Board) 10(23BBB) Capital gains from investments made by European Economic Community out of its own funds under European Community International Institutional Partners (ECIIP) Scheme 10(23BBC) Any income, including capital gains, of the South Asian Association for Regional Cooperation (SAARC) Fund for Regional Projects 10(23BBE) Any income, including capital gains, of the Insurance Regulatory and Development Authority (IRDA) 10(23BBG) Any income, including capital gains, of the Central Electricity Regulatory Commission (CERC) 10(26B) Any income, including capital gains, of a corporation established by a Central, State or Provincial Act or of any other body, institution or association (being a body, institution or association wholly financed by Government) established for promoting the interests of the members of the Scheduled Castes (SC) or the Scheduled Tribes (ST) or backward classes 10(26BBB) Any income, including capital gains, of a corporation established by a Central, State or Provincial Act for the welfare and economic upliftment of ex-servicemen being the citizens of India 10(27) Any income, including capital gains, of a co-operative society formed for promoting the interests of the members of either the Scheduled Castes or Scheduled Tribes or both

22. Specified Funds and Trust Section Exemption 10(4D) In the hands of specified fund Capital Gains arising out of transfer of bonds or GDR referred in Section 115AC(1), rupee denominated bonds of Indian Company or derivative or such other securities notified by CG on a recognised stock exchange located in any IFSC where consideration for such transaction is paid or payable in foreign currency Specified Fund: Category III Alternate investment fund in IFSC where all units are held by Non-residents 10(23F) and 10(23FA) LTCG arising from equity shares of venture capital undertaking, in the hands of venture capital fund or venture capital company 10(23FB) Any income, including capital gains, of a venture capital company or venture capital fund arising from investment in a venture capital undertaking 10(23FBA) Capital gains income of an investment fund shall be exempt in the hands of the fund and shall be taxable in the hands of the unit holders of the fund (pass through status) 10(23FD) When unit holder of a business trust receives distributions from the trust, which includes a part of capital gains earned by the trust, it shall be deemed to be of the same nature and the same proportion in the hands of unit holders as that of business trust (REITs and InvITs) and shall be exempt from taxation in the hands of unit holders

23. Shares and Securities Section Exemption 10(33) Income from transfer of units of UTI 10(34A) Income arising on account of buy back of shares of listed as well as unlisted company (due to the fact that company pays BBDT @ 20% + surcharge + cess 10(25) Income from capital gains of the provident fund arising from the sale, exchange or transfer of securities which are held by such provident fund Capital gains received by following are exempt from taxation:- Trustees on behalf of recognised provident fund Trustees on behalf of approved superannuation fund Trustees on behalf of approved gratuity fund Board of Trustees constituted under the Coal Mines Provident Funds and Miscellaneous Provisions Act, 1948, on behalf of the Deposit-linked Insurance Fund Board of Trustees constituted under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, on behalf of the Deposit-linked Insurance Fund 10(25A) Any income including capital gains arising in the hands of Employees’ State Insurance Fund 10(47) Any income, including capital gains, of an infrastructure debt fund Contd.

24. Section Exemption 10(26AAA) Capital gains arising to a Sikkimese individual from any source in the state of Sikkim Shall not apply where assessee is a Sikkimese woman and she marries an individual who is a non-Sikkimese and Such marriage takes place on or after 01.04.2008 10(37) Capital Gains from compulsory acquisition of Rural agricultural land under any law or through a mode of transfer where the consideration or compensation is determined by Central Government or RBI Conditions: The assessee is an individual or an HUF Land was used for agricultural purposes by such HUF, individual or his parents, for a period of 2 years immediately prior to the date of transfer Such income has arisen or consideration is received on or after 01.04.2004 10(37A) Land Pooling Scheme – Exemption available to Individual or HUF owner of land under the scheme Capital gains arising from following transfer shall not be chargeable to tax— Transfer of capital asset being land or building or both, under land pooling scheme Sale of Land Pooling Ownership Certificates received under the scheme in lieu of land or building or both transferred Sale of reconstituted plot or land, received in lieu of land or building or both, within 2 years from the end of the FY in which the possession of such plot or land was handed over Applicable retrospectively from 01.04.2015 Land Pooling Scheme - An alternative form of arrangement made by the Government of Andhra Pradesh for formation of new capital city of Amaravati to avoid land-acquisition disputes and lessen the financial burden associated with payment of compensation under that Act. In Land pooling scheme, the compensation in the form of reconstituted plot or land is provided to landowners. Miscellaneous

25. Capital Gains for Non-Residents

26. Capital Gains in case of Non Residents - 1 st Proviso to Sec 48 and Rule 115A Where a non resident transfers shares/debentures of an Indian Company , bought in foreign currency, capital gains shall be computed as under: Particulars Conversion Rate Sale consideration Shall be converted in foreign currency at average Telegraphic Transfer (TT) buying and selling rate on date of transfer Expenses on transfer Cost of acquisition Shall be converted in foreign currency at average TT buying and selling rate on date of acquisition Capital gains Capital gains will be computed in foreign currency as the components of computation are stated in foreign currency. The computed capital gains in foreign currency shall then be re-converted into rupees at the TT buying rate on the date of transfer No indexation benefit shall be available for the above transaction in case of long-term capital assets Once the original investment is liquidated by the non-resident investor, the above provision of computation of capital gains shall apply to all subsequent re-investments made by such non-resident investor in the Indian Company The share/debentures may be listed or non-listed The transferor should be a non resident at the time of transfer and non-resident includes a foreign company This proviso is not applicable to units of UTI and mutual funds Long term capital asset being equity share in a company, units of an equity oriented fund or units business trust shall remain outside the purview of 1st Proviso to Section 48 - 3rd Proviso to Section 48

27. Contd. Foreign currency means any currency other than Indian currency Indian currency means currency which is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under Sec 28A of the Reserve Bank of India Act, 1934 TT buying/selling rate in relation to a foreign currency, means the rate of exchange adopted by the State Bank of India for buying or selling such currency where such currency is made available through a telegraphic transfer In case of non-resident, any gains arising on account of appreciation in value of a rupee against foreign currency at the time of redemption of rupee denominated bond of Indian Company held by non-resident, shall be exempt from taxation of capital gains Treatment of appreciation in rupee at the time of redemption of rupee denominated bond (RDB) of Indian Company-5th Proviso to Sec 48

28. Exempted Transfers Transfer of bonds or GDRs referred under Sec 115AC(1) Sec 47(viia) Where any capital gains arises on transfer of bonds or Global Depository Receipts (GDRs), referred under Sec 115AC(1), outside India by a non-resident to another non-resident, it shall be exempt from taxation Sec 47 (viiab) Where a non-resident or a specified fund transfers bonds or GDR referred in Sec 115AC(1), rupee denominated bond (RDB) of Indian Company or derivative or such other securities notified by Central Government, on a recognised stock exchange located in any International Financial Services Centre (IFSC) and where the consideration for such transaction is paid or payable in foreign currency, such transaction shall not be regarded as transfer and thus, exempt from taxation Bonds mentioned under Sec 115AC(1) Bonds of an Indian company issued in accordance with such scheme as the Central Government may specify in this behalf, or Bonds of a public sector company sold by Government and purchased by non-resident in foreign currency Cost of acquisition – Sec 49(2ABB) - When shares are acquired by non-resident of redemption of GDRs mentioned above, the cost of acquisition shall be price of such shares prevailing on any recognised stock exchange on the date of request of redemption being made

29. Contd. Conversion of bonds specified under Sec 115AC(1) into shares or debentures — Sec 47(xa) Cost of acquisition - Sec 49(2A) – COA of such converted shares or debentures shall be the cost of the bonds in respect of which the assessee received such converted shares or debentures Transfer of rupee denominated bonds — Sec 47(viiaa) Transfer of rupee denominated bond of an Indian company issued outside India between two non residents outside India shall be exempt Transfer of Government securities – Exempted Transfer - Sec 47(viib)

30. Rates of Tax Category of Asset Rate of Tax Long term capital assets In case of transfer of securities which are subject to taxation as per 1st proviso to Sec 48 20% without indexation Unlisted securities or shares of a company in which public are not substantially interested (which are not subject to taxation as per 1st proviso to Sec 48) 10% without indexation Listed securities (other than units) or zero coupon bonds 10% without indexation Any other long term capital asset 20% with indexation Short term capital assets equity share in a company or a unit of an equity-oriented fund or a unit of a business trust 15% Other short term capital assets Normal slab rates

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