Budget 2017: some Nuances

Budget 2017: some Nuances

FPJ BureauUpdated: Thursday, May 30, 2019, 09:27 AM IST
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On the next day after Budget 2017, we had written a column detailing the various tax provisions contained in the Budget that directly affected the individual taxpayer.

This week we shall be examining other similar provisions that are significant and could have far reaching consequences so far as the common taxpayers and investors are concerned.

Redevelopment Projects

The Budget has addressed any ambiguity and practical inconvenient that existed in redevelopment projects by bringing out clear cut provisions and tax treatments of various payments.

Capital gain is normally chargeable to tax in the year in which transfer takes place except in certain cases. The definition of ‘transfer’ includes any arrangement or transaction where any rights are handed over in execution of part performance of contract, even though the legal title has not been transferred. Therefore Joint Development Agreements (or Redevelopment projects as they are popularly known) between the owner of immovable property and the developer triggers the capital gains tax liability in the hands of the owner in the year in which the possession of immovable property is handed over to the developer for development of the project.

With a view to minimise the genuine hardship which the owner of land may face in paying capital gains tax in the year of transfer, it is proposed that in case of an assessee being individual or HUF, who enters into an agreement for development of a project, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority.

The stamp duty value of the owner’s share, being land or building or both, in the project on the date of issuing of said certificate of completion as increased by any monetary consideration received, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

The benefit of this proposed regime shall not apply to an assessee who transfers his share in the project to any other person on or before the date of issue of the certificate of completion. In such a situation, the capital gains as determined under general provisions of the Act shall be deemed to be the income of the previous year in which such transfer took place and shall be computed as per provisions of the Act without taking into account this proposed provisions.

Also, the cost of acquisition of the share in the project being land or building or both, in the hands of the land owner shall be the amount which is deemed as full value of consideration under the said proposed provision.

These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

It is also proposed to insert a new section 194-IC in the Act so as to provide that in case any monetary consideration is payable under the specified agreement, tax at the rate of ten per cent shall be deductible from such payment. This amendment will take effect from 1st April, 2017.

Expanding the scope of long- term bonds under 54EC

The existing provision of section 54EC provides that capital gain to the extent of Rs. 50 lakhs arising from the transfer of a long-term capital asset shall be exempt if the assessee invests the whole or any part of capital gains in certain specified bonds, within the specified time. Currently, investment in bond issued by the National Highways Authority of India (NHAI) or by the Rural Electrification Corporation Limited (REC) is eligible for exemption under this section.

Many a times it used to so happen that bond issues from these two companies were not available for one to invest the capital gains in. Also, especially in Tier 2 and Tier 2 towns, sometimes accessing these bond issues used to become difficult. There was an urgent need for more options to be available for claiming the Sec. 54EC exemption.

In order to widen the scope of the section for sectors which may raise fund by issue of bonds eligible for exemption under section 54EC, it is proposed to amend section 54EC so as to provide that investment in any bond redeemable after three years which has been notified by the Central Government in this behalf shall also be eligible for exemption. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years. While this is indeed a welcome amendment, one hoped that the scope of Sec. 54EC had been expanded to include more instruments as such. For example, say mutual fund units could have been made eligible as Sec. 54EC investments, of course subject to the applicable lock-in etc. Perhaps it is something that the government could consider in time to come.

Tax Arbitrage on Interest on Housing Loan Watered Down

This is a far reaching move that is surely going to cause ripples in the property market.

As per the current provisions of the tax law, interest on housing loan on one Self Occupied Property (SOP) was deductible up to Rs. 2 lakh. However, the interest on any subsequent property (second property onwards) was deductible without any limit. Such interest had to be first set off against the rent received (or deemed to be received). After such set-off, if any interest remains unabsorbed, the same could be set-off against other income heads such as Salaries or Capital Gains. This tax set-off was a very big attraction for high networth investors who purchased properties as investments.

Sometimes the interest used to be so high that almost the entire other income used to be adjusted against the same, thereby rendering the investor’s entire income tax-free! Any capital gain that the property manifested used to be a bonus.

Budget 2017 has substantially watered down this tax arbitrage by specifying that set-off of loss under the head “Income from house property” against any other head of income shall be restricted to two lakh rupees for any assessment year. So while the entire interest can still be adjusted against rent, the adjustment against other types of income will be limited to Rs. 2 lakh only!

The immediate fallout of this would be on the property market. As it is, due to the demonetization, the froth in the prices had settled down. Now, with this move, as investors get disincentivized, prices will fall further. All in all good news for the genuine buyer who so far had been a mute spectator to spiraling real estate prices.

To Sum

In the days to come, further nips and tucks in Budget 2017 will be revealed by the fine print. Watch this space for updates regarding the same.

The authors may be contacted at wonderlandconsultants@yahoo.com

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