The Income-tax Act, 1961 provides an option to individual to save tax on LTCG by investing in specified instruments under section 54 to 54GB, as applicable.
Abhishek Soni, CEO, Tax2Win.in – an ITR filing website, explains with an example how this extension helps an individual. Suppose an individual has sold a long term capital asset on April 21, 2021 and last date to invest in 54EC bonds to save tax on LTCG is October 21, 2021. However, he failed to make such investment. Now by the virtue of this circular, the last date of investment in 54EC bonds would be March 31, 2023. This is because the due date of investment falls between April 1, 2021 to February 28, 2022.
Soni says, “Generally, an individual has three options to save tax on LTCG under the Income-tax Act. An individual can save tax on LTCG under either section 54, 54EC or 54F.” He explains how an individual can save tax on LTCG using these three sections below:
a) Under the Income-tax Act, an individual can save tax on LTCG under section 54 by buying a residential house. The LTCG must have arisen from selling of residential house to be eligible to save tax on LTCG under section 54. The tax on LTCG under section 54 can be saved if the house is bought within two years from sale or one year prior to sale of asset or constructed within 3 years from sale date.
b) If an individual does not want to buy a residential house to save tax on LTCG, then he/she has an option to invest in 54EC capital gains bonds. Once the long -term capital asset is sold, an individual is required to invest the LTCG amount in specified bonds within 6 months from sale. These bonds have a tenure of 5 years. An individual will earn the interest on these bonds. The interest earned is taxable in the hands of individual. An individual can invest maximum of Rs 50 lakh under the specified 54EC bonds.
c) Third option available to individual is section 54F. Under this section, an individual who has earned LTCG from any asset (other than residential house), can invest the LTCG in a residential house to save tax. Here also, tax on LTCG can be saved, if the house is bought within two years from sale or one year prior to sale of asset or constructed within 3 years from sale date. For example, say you have earned capital gains from selling of equity shares. Now, if you wish to save tax on LTCG, then you can utilise LTCG to buy a residential house.
How LTCG are taxed under the Income-tax Act
The rules of LTCG taxation are different for different asset classes. The taxation of capital gain depends on the holding period of the asset, nature of asset and status of the individual.
In case of immovable property such as house, land, building, the capital gains will be termed as LTCG, if the property has been sold after 24 months from the date of purchase. The LTCG earned from selling of immovable property will be taxed at rate of 20 per cent with indexation benefit. The indexation benefit allows an individual to adjust the purchase price to the present value to calculate the capital gains.
What the CBDT circular said
The Central Board of Direct Taxes (hereinafter referred to as “the CBDT”) had vide Circular No. 12 of 2021 dated 25.06.2021 provided relaxation in respect of certain compliances to be made by taxpayers including inter alia investment, deposit, payment, acquisition, purchase, construction or such other action, by whatever name called. for the purpose of claiming any exemption under the provisions contained in Section 54 to 54GB or the Income tax Act, 1961 (hereinafter referred to as “the Act”). By point 7 of the Circular it was provided that the aforementioned compliances for which the last date of such compliance fell between 01″ April, 2021 to 29′” September 2021 (both days inclusive), may be completed on or before 30′” September, 2021.
In view of the representations received and on further consideration of the then prevailing COVID-19 pandemic and resultant restrictions imposed, causing genuine hardship faced by taxpayers in making the aforementioned compliances under the Act, the CBDT, in exercise of its power under Section 119 of the Act, hereby provides that the compliances to be made by the taxpayers such as investment, deposit, payment, acquisition, purchase. construction or such other action, by whatever name called, for the purpose of claiming any exemption under the provisions contained in Section 54 to 54 OB of the Act, for which the last date of such compliance falls between 01″ April, 2021 to 28th February, 2022 (both days inclusive), may be completed on or before 3151 March 2023.