Capital Gain on Compulsory Acquisition of Immovable Property: Section 45(5)
In the realm of income taxation in India, when a government agency necessitates any compulsory acquisition of land, it is considered a transfer according to the provisions outlined in Section 45(5) of the Income Tax Act of 1961. As a result, this event triggers the imposition of Capital Gains Tax, calculated in accordance with the stipulations defined within the Act.
However, it’s important to note that specific exemptions are granted under the Income Tax Act to ease the burden of Capital Gains Tax for individuals impacted by such compulsory acquisitions. Sections 54 to 54GB encompass these exemptions, providing a structured framework to alleviate the tax implications that may arise from the compulsory acquisition of immovable property.
Year of Charging Tax
(a) If the government acquires a capital asset under law, or the consideration for the asset’s transfer is determined or approved by the government or RBI, the capital gains tax is applicable in the previous year when the initial compensation, or a part of it, is received.
(b) In cases where compensation is received based on an interim order from a Court or Tribunal, the tax is chargeable in the previous year in which the final order from that Court or Tribunal is issued.
(c) If the owner of the capital asset isn’t satisfied with the compensation and seeks to enhance it through judicial authorities, any enhanced compensation is treated separately. The original computation of capital gains remains unchanged. Taxation is based on the receipt of the enhanced compensation. If the enhanced compensation is received by another person due to the original transferor’s death or other reasons, that recipient is liable for the capital gains tax on the enhanced compensation
Period of Holding
When it comes to determining how long you’ve held an asset before its transfer, it’s essential to consider the period of holding. This period starts from the date of the asset’s purchase or acquisition and continues until the date of its compulsory acquisition. When calculating capital gains on the enhanced compensation received later on, we look back to the initial computation. This helps us understand the nature of the capital gain and how it originated from the first calculation and apply that to the enhanced compensation.
Value of Consideration
The compensation you receive for the compulsory acquisition of a capital asset is crucial in calculating capital gains. The total compensation you receive or are entitled to, whether the original amount or any enhancements, is considered the full value of consideration.
For the initial compensation, this value is used to compute the capital gains. Similarly, if you receive enhanced compensation, that amount is treated as the sales consideration for capital gains calculation related to the enhancement.
In case the compensation is later reduced by a Court, Tribunal, or another authority, the capital gain for that year is re-calculated based on the reduced compensation.
Cost of Acquisition/Improvement
When dealing with the acquisition or improvement costs of a capital asset being compulsorily acquired, it’s important to calculate them accurately. These costs, including the indexed ones, are determined following standard guidelines outlined in tax regulations.
In cases where the compensation is received in installments, the acquisition cost can be fully deducted in the year you receive the first installment. This eases the tax burden and aligns with the way compensation is received.
However, when it comes to computing capital gains from enhanced compensation, the acquisition and improvement costs are considered nil.
Exemptions
You have an opportunity to claim exemptions from capital gains when a capital asset is transferred. These exemptions are available under Sections 54 to 54GB of the Income Tax Act, provided you meet specific conditions.
TDS in case of Compulsory Acquisition of Immovable Property: Section 194LA
When it comes to the compulsory acquisition of immovable property, the Income Tax Act’s Section 194LA steps in to ensure proper tax handling. If non-agricultural land is compulsorily acquired under current laws, the party disbursing compensation or enhanced compensation to a resident must deduct a 10% tax from the amount.
This tax deduction happens when the compensation or enhanced compensation is paid or set to be paid. Essentially, anyone responsible for making these payments during a compulsory property acquisition scenario needs to adhere to these tax deduction rules. However, it’s important to note that this tax deduction applies only when the recipient is a resident of India.
Rate of TDS
As per Section 194LA of the Income Tax Act, a 10% tax is deducted from the compensation paid or due to a resident individual.
However, if the recipient doesn’t provide their PAN, the deduction rate jumps to 20% under Section 206AA. Similarly, if the deductee hasn’t filed an income return for a specified period, the deduction rate is also 20% under Section 206AB. When both these sections are applicable, the higher rate between 206AA and 206AB is enforced.
Notably, no tax deduction is mandated if the total compensation for the financial year doesn’t exceed Rs. 2,50,000. Additionally, tax won’t be deducted under Section 194LA in certain cases, including when the compensation is tax-exempt under Section 96 of the Right to Fair Compensation and Transparency in Land Acquisition Act, 2013, or if the sum is payable to specific entities like the government or RBI.
In situations where an individual’s estimated tax liability justifies a lower or nil tax deduction, they can request a certificate for reduced deduction under Section 197 from the assessing officer.
TDS Deposit & Filing Provisions
When tax is deducted, it needs to be promptly deposited to the Central Government using Challan ITNS 281 within 7 days after the month of deduction. However, for deductions in March, the deadline extends to 30th April of the following financial year.
Furthermore, the entity responsible for this tax deduction must file a quarterly statement of the tax deducted at source using Form 26Q. This statement helps maintain a record of the deductions made. Additionally, the deductor is obliged to provide a TDS certificate (Form No. 16A) to the recipient within 15 days from the due date of the TDS statement.
Consequences for Failure in TDS Related Compliance
If the person responsible for deducting tax fails to do so or doesn’t deposit the deducted tax, they’ll be deemed an assessee-in-default. This can lead to interest charges under section 201.
Failure to adhere to TDS deduction provisions can result in penalties and prosecution. If someone neglects to deduct tax at the source, they may face a penalty as per Section 271C. Similarly, if tax is deducted but not deposited with the Central Government, penalties under Section 221 and prosecution under Section 276B are likely.
Failing to furnish a TDS statement incurs fees under Section 234E, set at Rs. 200 per day of default, not exceeding the TDS amount. Additionally, penalties of Rs. 10,000 to Rs. 100,000 (as per Section 271H) and Rs. 500 per day (as per Section 272A) for the duration of the failure can be imposed.
Moreover, if the person responsible for issuing TDS certificates fails to do so, they may face a penalty of Rs. 500 per day until compliance, in accordance with Section 272A.
Interest on Compensation or Enhanced Compensation: Section 56(2)(viii)
When you receive interest on compensation or enhanced compensation, it’s important to understand its tax implications. According to Section 56(2)(viii), this income falls under the category of “Income from Other Sources” and is subject to taxation. However, there’s a provision for a 50% deduction on this interest income as per Section 57.
It’s key to note that, as per Section 145B, the interest becomes taxable in the specific year it’s received. This taxation applies only if the original or enhanced compensation is taxable. In other words, if the compensation itself is tax-exempt, the interest on that compensation will also be tax-exempt.
Capital gains on Compulsory Acquisition of Urban Agricultural Land: Section 10(37)
If you’re an individual or part of a Hindu Undivided Family (HUF), there’s good news regarding capital gains from the compulsory acquisition of urban agricultural land. According to Section 10(37), you can claim an exemption for the capital gains resulting from the transfer of such land. This exemption is applicable if you received compensation on or after April 1, 2004. To qualify, the land must have been used for agricultural purposes by you (or by your parents, in the case of an individual) for at least 2 years before its transfer.
Conclusion
Understanding these rules is essential for taxpayers dealing with capital gains tax concerning compulsory acquisition or compensation enhancements, ensuring compliance and fair taxation practices. Moreover, by adhering to the related provisions upon deposit and filing, we ensure a streamlined and compliant approach to tax deductions during property transactions. Understanding these processes is vital for a smooth and lawful handling of tax obligations.
Follow the Link to Access the CBDT Circular on Compensation to Land Owners on Land acquired under RFCTLARR Act 2023–https://incometaxindia.gov.in/communications/circular/circular362016.pdf
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