Overhaul of capital gains tax regime

1. Simplification of provisions relating to holding period for determination of long term and short-term capital assets:
It is proposed that there will only be two holding periods i.e. 12 months and 24 months for determining whether the capital gains is short-term capital gains or long term capital gains. The holding period for different classes of capital assets has been modified as under:

2. Rates for short term capital gains increased:
Tax rate for short-term capital gain under section 111A (i.e. STT paid equity shares), units of equity oriented mutual fund and unit of a business trust is proposed to be increased to 20% from the present rate of 15%. Short term capital gains on other capital assets would continue to be taxable at the applicable slab rate.

3. Rates for long term capital gains reduced, however indexation benefit is taken away:
‍Tax rates for long term capital gains is proposed to be revised as under:

While reduction of long term capital gains tax rates by 7.5% is going to bring cheer on one hand, the loss due to abolition of indexation benefit could hurt the tax payers who have held the capital assets for long period.

The exemption limit in respect of long term capital gains arising from transfer of listed equity shares, equity oriented mutual funds and business trusts are proposed to be increased from ₹ 100,000 to an aggregate amount of INR 125,000.
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* Any transfer, redemption or maturity of unlisted debentures (including debentures convertible into equity), unlisted bonds is proposed to be taxable as short terms capital gains irrespective of holding period under Section 50AA effective from July 23, 2024.

4. Parity in taxation between resident and non-resident taxpayers:
‍The long-term capital gains tax rates for residents and non-residents are different under existing provisions which are proposed to be brought at par. The provisions with respect of computation of capital gains in foreign currency in the hands of non-residents for shares or debentures originally acquired in foreign currency are retained (resulting in foreign currency fluctuation benefit).

Abolition of Angel Tax provisions

Existing provision:
Section 56(2)(viib) provides for the taxation of excess premium received by a closely held company on issue to shares to a resident or a non-resident investor as income from other sources.

Proposed amendment:
It has been proposed to abolish the provision of Section 56(2)(viib) with effect from April 1, 2024.

Impact:
Section 56(2)(viib) was amended w.e.f. April 1, 2023 to include non-resident investors in its ambit. This amendment will significantly benefit startup world and other companies and reduce compliance burden on them. However, the scrutiny under Section 68 shall continue to apply on the nature and source of funds raised by the company and if the explanation offered by the company / the investor is not satisfactory (in the opinion of the tax authorities), the sum so credited may be charged to income-tax as the income of the company for that year.

Gifts by corporate entities is proposed to be liable to capital gains tax

Existing provision:
Section 47(iii) provides for non-taxability of transfer of capital assets under a gift or will or an irrevocable trust with an exception with respect to the specified Employee Stock Option Plans (ESOPs).

Proposed amendment:
It has been proposed to limit the benefits of these provisions specifically to Individuals and HUF only. This amendment is proposed to be effective from April 1, 2024.

Impact:
Transfer of capital assets out of natural love and affection shall only be considered as tax exempt transfer, which is not present in case of persons other than Individual/HUF.

Clarification on computation of cost of acquisition of equity shares tendered under offer for sale (OFS) under an IPO

For the purpose of computation of cost of acquisition of equity shares tendered under offer for sale (OFS) under an IPO, which is taxable under section 112A of IT Act, Fair Market Value (FMV) would be calculated as follows: The FMV should be proportional to the cost of acquisition, based on the ratio of the Cost Inflation Index (CII) for the financial year 2017-18to the CII for the year in which the asset was first held by the assessee, or from April 1, 2001, whichever is later. This amendment is proposed to be applied retrospectively from April 1, 2018.

Impact:
While the intent of the Government was always clear to tax the shares sold under OFS, the language was little ambiguous and thus allowed led the tax payers to take an aggressive stand and not pay the tax. The amendment brings in the much-needed clarity.

The STT on purchase and sale of equity shares on delivery basis remains at 0.1%.

Rental Income from residential house property to be taxed under Income from House Property

Background:
Rental income earned by a taxpayer from letting out a residential house property can be categorized under either "Income from House Property" (IFHP) or "Profits and Gains of Business or Profession" (PGBP). Under IFHP head, the income is eligible for a standard deduction of 30% along with deductions for interest paid on borrowed capital for acquisition, construction, repair, or reconstruction of the property; whereas under PGBP head, the taxpayer, while calculating the total income, can deduct the expenses incurred to maintain the property, claim depreciation. Further there is no requirement to pay tax on notional rent when the property is not let out. Number of taxpayers have, in the past, claimed income earned through renting of residential house property held as stock-in-trade under PGBP which has led to numerous litigations with the tax authorities.

Proposed Amendment:
To resolve this issue, it is proposed to amend the section 28 of the IT Act so as to clarify that any income from letting out of a residential house or a part of the house by the owner shall not be chargeable under the head “Profits and gains of business or profession” and shall be chargeable under the head “Income from house property”. This amendment is proposed to take effect from April 1, 2024.

Impact:
Rental income earned by taxpayers engaged in the business of letting out of residential house property or income from renting house property, even if held as stock-in- trade (mainly unsold inventory of builders) will would now be taxable under IFHP head. Such income will be subject to a standard deduction of 30%, even if actual expenses incurred to maintain the property and depreciation exceeds the standard deduction.

TDS @ 10% on payment of salary, remuneration, interest, bonus or commission by partnership firm / LLP to partners

Existing Provision:
Presently there is no provision for deduction of tax at source (TDS) on payment of salary, remuneration, interest, bonus, or commission to partners by the partnership firm (including LLP).

Proposed Amendment:
‍A new Section 194T has been is proposed to be inserted to bring payments such as salary, remuneration, commission, bonus and interest to any account (including capital account) of the partner of the firm / LLP under the purview of TDS for aggregate amounts more than Rs 20,000 in the financial year. Applicable TDS rate will be 10%.

Impact:
Withdrawal of funds by partners from a partnership firm / LLP would need to be appropriately identified as withdrawal of capital or withdrawal of remuneration etc. so as to comply with TDS provisions.

TDS on immovable property applicable if the total consideration paid by one or more transferees is Rs 50 lakh or more

Existing Provision:
Section 194-IA of the IT Act provides that any person paying consideration for the transfer of immovable property (excluding agricultural land) to a resident person should deduct TDS at 1% of the consideration or the stamp duty value, whichever is higher, provided the consideration or the stamp duty value involved this amount is Rs 50 Lakhs or more.

Proposed Amendment:
‍The Section has been proposed to be amended to clarify that if there are multiple transferors or transferees involved in the transaction, TDS at @ 1% should be deducted if the total consideration paid or payable by all transferees to all transferors is Rs 50 lakhs or more. This amendment is proposed to take effect from October 1, 2024.

Impact:
The mis-interpretation amongst the taxpayers that no TDS is required to be deducted if the amount paid by each buyer is individually less than the threshold of Rs 50 lakhs has been clarified and the loophole has been plugged.