But can you reinvest what you have never received? The obvious answer is No. However, the tax laws can require you to reinvest the money you have not received; otherwise, you may be asked to pay taxes. We are talking about section 54F of the Income-tax Act, 1961.
Section 54F of the Income-tax Act provides an exemption from having to pay capital gains tax under specified conditions. This exemption can be claimed if any long-term capital asset (such as land, building, mutual fund units except house property) is sold and the amount received from such transaction is invested in purchasing or constructing a new house property within the specified time. This means that if you have sold house property, then you cannot use section 54F to claim exemption from capital gains tax. In contrast to other sections (like section 54 or section 54EC), which require reinvestment of only the capital gains, section 54F requires the taxpayer to invest the entire sale proceeds in a residential house.
The condition of reinvesting the sale proceeds poses many practical difficulties for taxpayers. These difficulties stem from the discrepancy between the actual net sale amount received by the seller and the net sale amount as deemed by the tax laws. Often as a result of this difference, the actual net sale amount in the hands of the recipient is less than the net sale amount as deemed by income tax laws. These differences are mainly due to three factors:A) Minimum deemed amount,
B) TDS and
C) Repayment of loan, if any.
Below we look at these three factors in detail.
Section 50C of the Income-tax Act provides that if an immovable property is sold for an amount below the stamp duty value (or ready reckoner rate or circle rate), then for capital gains calculation, the stamp duty value shall be considered as the real sales consideration. Time and again, the income tax department tries to invoke provisions of section 50C in cases where an exemption under section 54F is claimed.
The implication of the same can be understood with an example. Let us assume that the cost of land is Rs. 75, the actual sale value is Rs. 100, and the reckoner rate is Rs. 150. The real gain is Rs. 25 (Rs. 100-Rs. 75), but the taxable capital gain is Rs. 75 (Rs. 150-Rs. 75). The income tax department argues that for taxpayer to avail tax exemption of Rs. 75, the taxpayer has to invest Rs. 150. When a taxpayer has received Rs. 100, how is he supposed to invest Rs. 150?
There is a Latin Legal principle for such a situation “Lex non-cogit ad impossibilia”. It means “the law does not compel the impossible.” This principle holds that individuals should not be held liable for failing to fulfill an obligation that is impossible to perform. The courts have also held that such an intention of the income tax department is incorrect. Thus, an express clarification in this regard would help in reducing unnecessary litigation.
A salaried individual is fully aware of the difference between gross income and net income. Net income is gross income less TDS, and the tax is levied on the gross income, not the net income received after TDS. In the case of the sale of immovable property, TDS is levied at the rate of 1% if the sale value exceeds Rs 50 lakh.
To claim tax exemption under section 54F, a taxpayer is obligated to invest the entire sale proceeds in a new residential property, even though the actual sale proceeds received are lower on account of TDS. As a relief measure, it may be expressly stated that the TDS component is deemed to have been invested in the new property.
Alternatively, the investment in a new property without the TDS component should be considered sufficient compliance for tax exemption under Section 54F.
Any repayment of a loan taken on the original asset being sold, from the sale proceeds of such asset, reduces the sale amount left in hand. . This makes it difficult for the taxpayer to invest the total sale amount in a new property. Budget 2023 should provide relief by allowing a reduction in the amount to be invested in a house property by the amount of loan repaid to the banks and financial institutions.
If implemented, the above suggestions would greatly help individual taxpayers and also help in reducing unwarranted litigation leading to the loss of scarce judicial resources.