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The Finance Act, 2023, has introduced significant amendments to Sections 54 and 54F of the Income-tax Act, 1961, which provide exemptions on capital gains arising from the transfer of long-term capital assets. These amendments, applicable from Assessment Year (AY) 2024-25, aim to limit the roll-over benefits claimed under these sections.

Understanding Sections 54 and 54F:

Section 54: This section allows an individual or Hindu Undivided Family (HUF) to claim exemption on long-term capital gains arising from the transfer of a residential house property, provided the gains are reinvested in another residential house property within specified timeframes.

Section 54F: This section provides a similar exemption for long-term capital gains arising from the transfer of any capital asset other than a residential house, provided the net consideration is reinvested in a residential house property within specified timeframes.

Key Amendments:

1. Limitation on Deduction Amount:

• Before FA 2023: There was no upper limit on the amount of capital gains that could be reinvested in a new residential property for claiming exemption under Sections 54 and 54F.
• After FA 2023: The amendment imposes a cap on the deduction amount. If the cost of the new asset exceeds ₹10 crore, the excess amount will not be considered for computing the deduction under these sections.

2. Capital Gains Account Scheme:

• Before FA 2023: Assessees could deposit the unutilized capital gains (under section 54) or net consideration (under section 54F)in the Capital Gains Account Scheme to avail the exemption if the amount was not reinvested on or before the due date of filing return u/s 139(1).
• After FA 2023: The amendments specify that the provisions for depositing in the Capital Gains Account Scheme will apply only to amounts up to ₹10 crore.

Objective and Implications:

The primary objective of Sections 54 and 54F has been to mitigate the housing shortage and encourage house-building activities. By capping the deduction amount at ₹10 crore, the government seeks to maintain the balance between providing tax relief for genuine reinvestment in residential properties and preventing excessive tax avoidance by high-net-worth individuals.

Conclusion:

The amendments to Sections 54 and 54F from AY 2024-25 mark a significant shift in the tax treatment of capital gains reinvested in residential properties. Taxpayers must carefully plan their investments and be aware of the new limits to optimize their tax benefits while complying with the updated provisions.

These changes reflect the government's commitment to rationalizing tax benefits and ensuring that they serve the broader goal of addressing housing needs rather than facilitating tax avoidance.

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Disclaimer: 

The information provided in this article is for general informational purposes only and does not constitute professional advice. The Author recommends consulting with a qualified tax advisor or legal professional to obtain specific advice related to your individual circumstances. Tax laws and regulations are subject to change, and the application of these laws can vary based on individual situations.

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