How To Claim Tax Benefits Under Section 54F
Who doesn’t love tax breaks and benefits? If you have sold or are planning to sell a commercial property or property on which a depreciation claim was made and you’re looking to invest the gains you make in a brand new residential property within the specific amount of time, then you’re in luck.
The Income Tax Appellate Tribunal or ITAT, recently decided that taxpayers who satisfy the above criteria can avail tax benefits under Section 54F. This decision came about since it was deemed that any capital gains earned on the sale of a property or asset on which the taxpayer claimed depreciation were short-term gains as per Section 50 of the Income Tax Act.
As you probably already know, short-term capital gains earned by a taxpayer are taxed in accordance with the tax slab that the individual falls under.
In general, certain provisions of the Income Tax Act give tax benefits to an individual who earns long-term capital gains from the sale of property or assets and then invests the gains into the purchase of new residential property. Depending on how much is invested in this property, the tax on the gains earned is lowered, effectively resulting in a reduction of the tax levied.
The Income Tax Appellate Tribunal though, says that the provisions under Section 54F of the Income Tax Act encapsulates the amount of capital gains earned from the transfer or sale of a long-term capital asset in the acquisition of a new property for residential purposes. In essence, any commercial asset or property that is deemed to be immovable and is owned for a period in excess of 2 years is said to be a long-term capital asset. However, before the FY 2017-2018, this period of ownership was 3 years.
Case In Point
The Income Tax Appellate Tribunal pointed to a decision taken by a Mumbai high court with regards to the case involving Ace Builders. In this particular case, the court stated that as per the provisions of Section 50 of the Income Tax Act, only the capital gains earned will be considered as short-term gains.
It also stated that Section 50 of the Income Tax Act makes no provision for the conversion of long-term capital assets to short-term capital assets. Due to this, tax benefits can be availed under Section 54F of the Income Tax Act even in the event of sale of the assets on which depreciation was claimed. Therefore, if the residential property that was newly acquired cost more than the gains received from the sale of the asset on which depreciation was claimed, then there would be no question of the taxpayer earning capital gains.
Before the decision of the Income Tax Appellate Tribunal, there was a case involving a garment manufacturer and exporter who sold an immovable property for Rs. 1.33 crores during FY 2011-12. Depreciation on the asset was claimed previously and this lowered the property’s written-down valuation, which fetched her capital gains to the tune of Rs. 1.28 crores.
She then decided to acquire a new house for residential purposes for Rs. 1.45 crores and claimed tax benefits as per the provisions of Section 54F of the Income Tax Act. However, according to Section 54F, tax benefits can only be availed if the newly acquired property was bought within the specified period of 2 years from the date the building was sold. If the newly acquired property cost more than the capital gains earned from the sale of the building, then the gains are non-taxable.
While the taxpayer, in this case, stated that the gains received from the sale of the building should be exempt from tax, her claim was initially denied by the lower tax authorities who in turn stated that the gains she received from the sale of the building were short-term capital gains rather than long-term capital gains. However, the Income Tax Appellate Tribunal overturned this decision and granted her exemption from tax.
Salient Features Of The ITAT’s Judgement
- The Income Tax Appellate Tribunal has made it clear that even though any capital gains earned following the sale of an asset such as office or commercial property are deemed to be short-term capital gains, the character or nature of the asset in question will remain unaltered.
- Any immovable asset or property owned for a period in excess of 2 years will be deemed to be a long-term capital asset. This will hold true even if depreciation is claimed on it.
- Under the provisions outlined in Section 54F of the Income Tax Act, tax benefits can be availed for any investment of capital gains made in residential property. Tax benefits can also be availed under Section 54E for any investment of capital gains made in bonds.
- The Income Tax Appellate Tribunal’s judgment has been based on decisions that were passed on previous occasions.
So if you’re looking to invest your long-term capital gains next time, keep this article handy and you could save a nifty sum on tax. Looking for other ways to invest your money? You’ve come to the right place.