Major amendments in Budget 2023 relating to Capital Gains

There are 3 major amendments in Capital Gains in this budget 2023 w.r.t. followings:

  1. Residential House Property (RHP)
  2. Gold
  3. Market Linked Debenture

A. Changes relating to Residential House Property (RHP): 

1. Background:

i. Section 54 relates to deduction when amount is invested in RHP on transfer of LT RHP;

ii. Section 54F relates to deduction when amount is invested in RHP on transfer of any LT asset.

2. Earlier upto FY 2022-23:

There was no limit for claiming deduction u/s 54 & 54F. You can claim any amount as deduction u/s 54 and 54F if you have invested in RHP or invest in CG A/c scheme.

3. From FY 2023-24:

It appears that government is specifically targeting HNI by reducing the tax benefits available. It is not me who is saying it by they only stated that explicitly in the budget memorandum and I quote “The primary objective of the sections 54 and section 54F of the Act was to mitigate the acute shortage of housing, and to give impetus to house building activity. However, it has been observed that claims of huge deductions by high-net-worth assessees are being made under these provisions, by purchasing very expensive residential houses. It is defeating the very purpose of these sections. In order to prevent this, it is proposed to impose a limit on the maximum deduction that can be claimed by the assessee under section 54 and 54F to rupees ten crore.” I.e. now assessee will not be able to claim deductions u/s 54 & 54F more than Rs.10 crore.

Now let’s see with the help of an example how it will turnout:

ParticularsSection 54Section 54F
Nature of Asset purchasedRHPAny other assets let’s say Commercial building
Year of Purchase2001-022001-02
Cost of Acquisition (COA)4 Crore4 Crore
Year of Sale2023-242023-24
Sale Value25 Crore25 Crore
Indexed COA14 Crore = (4 Crore * 350/100) (Assuming CII is 350 for FY 23-24))14 Crore = (4 Crore * 350/100) (Assuming CII is 350 for FY 23-24))
Capital Gain (Sale – Indexed COA)11 Crore11 Crore
Investment in new RHP in 202420 Crore20 Crore
Exemption available10 Crore4.4 Crore (CG 11 Crore * Investment in RHP 10 Crore / Sale Value 25 Crore)
Taxable CG**1 Crore6.6 Crore

**So based on the above table it can be said that, if you have invested Rs. 20 Cr for buying another house then exemption u/s 54 cannot exceed Rs. 10 Crores, although, investment in a House is Rs. 20 Crore. However, the exemption u/s 54F would be calculated on proportionate basis as the full net consideration is not invested in RHP.

So, formula is Capital Gains * Cost of New Asset / Net Consideration)

i.e. √  11*10/25 = 4.4 Crores

Not ❌ 11*20/25 = 8.8 Crores

Till FY 22-23 (AY 23-24) i.e. Up to March 2023, Rs. 8.8 Crore is allowed as Exemption. The formula had “Cost of New Asset” which could have been any amount up to net sales consideration but now they have specifically mentioned that if the cost of the new asset purchased is more than rupees ten crore, the cost of such asset shall be deemed to be 10 crores i.e. now the Cost of New Asset deemed to be 10 Crores for the purpose of exemption u/s 54F from FY 23-24 (AY 24-25).

B. Changes relating to Gold:

  • would attract. Hence, there would be no Capital Gains Tax.
  • Cost of Acquisition would be counted for the first asset that was bought before conversion.
  • Similarly, Period of Holding to bifurcate it into a short-term capital asset or a long-term capital asset shall be counted from the date when such first asset was acquired.

C. Changes relating to Market Linked Debentures (MLDs):

  • MLDs are Securities that have an underlying principal component as a debt instrument and the returns are linked to market returns.
  • Market Linked Debentures will now always be treated as Short Term Capital Asset (Irrespective of Period of Holding) and will be taxed at normal applicable rates.