[Opinion] Redefine ‘Net Consideration’ in Section 54F of Budget 2023

Authored by CA Naveen Wadhwa – DGM | Taxmann Advisory and Research & CA Chirag Wadhwa | Taxmann

Table of contents

1. Introduction
2. Minimum deemed consideration
3. TDS component
4. Repayment of loan

1. Introduction

What is the key to success? Invest, Earn, Reinvest.

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.

Section 54F of the Income-tax Act provides an exemption to roll over the investment into a new house property. This exemption is allowed if any long-term capital asset (other than a house property) is transferred, and the consideration received from such transfer is invested in purchasing or constructing a new house property within the specified time. In contrast to other sections (like Section 54 or Section 54EC), which require reinvestment of the capital gains, Section 54F requires the taxpayer to invest the net consideration in a residential house.

The condition of reinvesting the net consideration poses many practical difficulties. These difficulties stem from the discrepancy between the actual net consideration received by the seller and the net consideration deemed by the tax laws. These differences are mainly due to three factors: Minimum deemed consideration, TDS and Repayment of loan.

2. Minimum deemed consideration

Section 50C of the Act provides that if an immovable property is sold for a value 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 revenue tries to invoke provisions of Section 50C in cases where an exemption under 54F is claimed. The implication of the same can be understood with an example. If 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, and the taxable capital gain is Rs. 75. The revenue contends that to avail of an 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 a contention of revenue is incorrect. Thus, an express clarification in this regard would help in reducing unnecessary litigation.

3. TDS component

A salaried individual is fully aware of the difference between Gross Income v. 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 attracted at the rate of 1%. To claim the exemption under Section 54F, a taxpayer is obligated to invest entire sale proceeds in 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 exemption under Section 54F.

4. Repayment of loan

Any repayment of a loan taken on the original asset being sold from the sale proceeds of such asset reduces the amount of consideration actually received. This poses a severe difficulty for the taxpayers to invest the total consideration in a new property. This budget should provide relief by allowing a reduction in the amount of net consideration 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 have a wide impact on individual taxpayers and will help in reducing unwarranted litigation leading to the loss of scarce judicial resources and perplexity for taxpayers.

Dive Deeper:
[Opinion] Salaried Employees – Longing for Tax Relief from Union Budget 2023
[Opinion] Budget 2023: Cryptocurrency Taxation for Non-Residents Demystified
[Opinion] Seeking Full Interest on Tax Refunds after Updating Returns: Justified or Not?
[Opinion] Key Expectations for Budget 2023-24
[Opinion] Pre-Budget 2023 – Correct the Gold Scheme Name
[Opinion] Foreign Tax Credit: How it’s Treated as Assessee’s Income
[Opinion] Impact of Secs. 9B & 45(4) on Asset Distribution in Partnership Firms
[Opinion] Dilemmas in taxation of amounts received in respect of life insurance policy
[Opinion] Budget 2023 – Pre-Budget Expectations on Indirect Taxes
[Opinion] Union Budget 2023 | 5 Key Expectations for Start-ups
[Opinion] Penalty for TDS Delay: 3% Interest for Each Day
[Opinion] Pre-Budget 2023 – Eliminate Tax on Alimony
[Opinion] Pre Budget 2023 Wishlist | Corporate Taxation
[Opinion] Proposing Tax Deductions in Budget 2023 for Alternative Tax Regime