Part 54F offers an exemption from long-term capital good points arising from the switch of a long-term capital asset that’s not a residential home if the proceeds are used to buy or assemble a residential home in India. The hot button is that the acquire should be a long-term capital acquire for Part 54F to be related.
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Part 50AA is a brand new provision launched by the Finance Act 2023. After the most recent modification, it says that, however the definitions in part 2(42A) (which defines brief vs long run if held for twenty-four months) if the asset is a Specified Mutual Fund (acquired on or after 1st April 2023) or a MLD, or unlisted bonds or debentures transferred or redeemed or matures on or after the twenty third day of July, 2024 – then the whole capital good points shall be “deemed” to be a short-term capital acquire.
Specified Mutual Fund is outlined as a fund which invests greater than 65% in debt and cash market devices and an FoF that invests a minimum of 65% in such funds. The impact is that even when the holding interval would ordinarily classify the acquire as long run, beneath part 50AA it’s pressured to be short-term for these specified belongings. Thus part 50AA is a particular override (a deeming clause) that adjustments the classification of the acquire from a “long-term” to a “short-term” capital acquire for sure belongings.
So, opposite to the favored perception, the brand new amendments haven’t merely modified the taxation of long-term capital good points from Debt Funds and different belongings talked about above to slab charges, but it surely has modified the idea of “long-term” itself into “short-term” and successfully these belongings haven’t any “long-term” good points in any respect.
The impact – No exemption u/s 54F
The language of part 50AA is one in all deeming: “shall be deemed to be the capital good points arising from the switch of a short-term capital asset” (i.e. even when it might in any other case be long-term). Due to that deeming, the acquire loses the standing of long-term for these models, and you can not deal with it as long-term.
Since Part 54F requires the capital acquire to be long-term, if by utility of 50AA the acquire is “deemed short-term,” then you wouldn’t fulfill the prerequisite for 54F (i.e. being a long-term acquire). Thus you can not declare the exemption beneath 54F for that acquire. If a tax officer applies this literal studying, the computing of acquire and tax might be at slab charges and the taxpayer might be denied the 54F exemption.
Scope of litigation
In tax legislation, courts typically scrutinize deeming clauses narrowly. There could also be tax authority rulings or judicial choices sooner or later that interpret the interaction of 50AA and exemption provisions like 54F. The definitions and applicability of 50AA / 54F could also be amended in future budgets or Finance Acts. There’s a effectively‑established judicial steerage that deeming provisions are authorized fictions restricted to their object.
In related instances, courts have refused to permit a deeming provision to be prolonged past the precise goal for which it was enacted, and have accepted the taxpayer’s argument {that a} computation‑sort deeming clause doesn’t mechanically change the authorized character of the asset for unrelated exemption provisions. Part 50AA solely deems the character of the acquire for computation, not the character of the underlying asset for the needs of exemptions that require a protracted‑time period capital asset.
At present, there’s restricted direct judicial authority making use of Part 50AA to Part 54F. So, whereas the sensible and conservatively appropriate place is that 54F is not going to be accessible for funds inside 50AA, a reasoned authorized argument exists for a special final result, and the purpose stays litigable and unsettled.
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