#Budget2017: 3 Cheers For Capital Gains Tax Provisions

Updated on February 7, 2017:

Finance Minister Arun Jaitley during his Budget Speech on February 1 had  proposed a 10 per cent tax on those bought shares in unlisted cos after Oct 1, 2004. 

Further to the proposal, now the government is all set to release a list of transactions which will not fall under the "anti-abuse" provision of levying long-term capital gains tax on share transfer in unlisted companies.

For this, Central Board of Direct Taxes (CBDT) Chairman Sushil Chandra said that they are taking information from stakeholders of such companies and be able to come out with an exhaustive list where Section 10(38)  will not apply.

The provision, according to Chandra, was proposed during the Budget 2017-18 to track and put a stop to long-term capital gains being availed by investment in penny stocks and put an end to "sham transactions".

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Three measures announced by Finance Minister Arun Jaitley in his Budget 2017-18 have come as some good news for property holders.

• The holding period for availing lower rate of long-term capital gains tax has been reduced from three to two years. This will also bring in more supply in the market.

• The base year for computing capital indexation benefit has been tweaked — from the existing April 1, 1981 to April 1, 2001.

• Number of financial instruments (long-term capital bonds) to save long capital gains to be increased.

These come as a welcome change and will provide relief to tax payers, earning profits from sale of an immovable property; these could trigger investment flow, too.

What is capital gains tax?

Until an asset is sold, the value of a capital asset, such as a house, cannot be estimated in real terms. The gain is not realised unless the property changes hands. Short-term capital gains mean those held for less than a year long-term gains (LTCG) must find a mention while income tax is filed and therefore the significance is much higher. In the list of immovable property, only rural agricultural land is excluded from being called a capital asset.

LTCG is computed as the difference between net sale proceeds and the indexed cost of acquisition and improvement. As prescribed, if any cost to acquire or improve has been incurred by a home buyer, it needs to be indexed or inflated. In order to avail an exemption from LTCG, property sellers usually reinvest the gains in another property within the country. Another way to save your money is when you invest it in notified bonds within 6 months of the sale. However, there is a limit to this. As per section 54EC, you can only invest up to Rs 50 lakh. As of now, there were only two channels- the National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC). The interest rates are usually modest, at six per cent and is taxable, this is why, the two scenarios usually prevail:

• Many prefer paying the taxes than investing for such a modest interest rate. They choose to invest whatever remains in quality equity funds, or

• The lock-in period was three years and thus, it was tempting to pay the tax and earn handsomely on the returns on the balance.

However, these bonds are the best investments you could make despite the interest being taxable. With more number of instruments coming your way and a shorter lock-in period, it becomes more attractive an option.

Promoters, too, can pay capital gains tax within a year after construction. This would be beneficial for landowners thereby reducing prices, the effect of which can be enjoyed by home buyers.

Moreover, Jaitley proposed to exempt persons holding land on June 2, 2014, and whose land is being pooled for the creation of capital city of Telangana under government schemes from capital gains tax.