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Income Tax--Reinvestment Provisions

Reinvestment Provisions Post Budget 2024

Srivatsan Ranganathan

On 16th August 2024, the Finance Bill (2) 2024 became an Act. This article discusses the impact of the changed provisions on reinvestment provisions under section 54, 54F, 54EC etc.

1. Heads up on the amendments

Readers will remember that Budget 2024 made sweeping changes in the regime of capital gains, the key being removal of indexation benefit for everyone at the outset. Then in the subsequent changes to the originally proposed Finance Bill (2) 2024 indexation benefit was reintroduced for the benefit of residents alone only on immovable property viz. land/building or both. Now resident individuals/HUFs have an option to pay Capital gains tax on immovable property either @ 20% with indexation benefit or 12.5% without indexation benefit. For the purposes of law a resident but not ordinarily resident (RNOR) is almost treated on par with that of a resident, thus this option would be available even to RNOR.

2. Revisiting reinvestment provisions

Reinvestment provisions are available only on long term capital gains and not on short term capital gains. We are limiting our discussion only to long term capital gains.

The holding period has been rationalized in the Budget 2024 wherein for listed securities it will be treated as short term for holding period upto 12 months and beyond this will be long term. For all other assets other than slump sale under section 50B it will be short term if held for 24 months or less and long term if held beyond 24 months.

Under reinvestment provisions of section 54, an individual/HUF may reinvest in not more than two residential properties subject to a cap of Rs. 10 crores and avail the benefit of reinvestment. The cap on the gain which can be reinvested is Rs. 2 crores under section 54. The re-investment will need to be made within the timeline of one year before or two years after the date of transfer for purchase of new residential property or assessee must have within three years from the date of transfer constructed a residential property.

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