While the increase in basic tax exemption, hike in the deduction limit under Section 80C and the increase in interest deduction limit on home loans could lead to substantial tax savings, there are various other proposals in Budget 2014-15 that would impact individual taxpayers and retail investors. A look at the fine print.
Section 54: Capital gains exemption for investment in a residential house
From now, you cannot sell one house and invest the money in two smaller houses to claim long-term capital gains tax exemption. The explanatory memorandum to the Finance Bill states that the benefit of long-term capital gains tax exemption can be availed only for re-investment in one residential house, and that too has to be purchased in the country. Under Section 54 of the Income Tax Act, 1961, a taxpayer can get long-term capital gains tax exemption after selling his house property, which is held for more than three years, and purchase another residential house or construct a house within three years of the sale.
Section 54 EC: Capital gains tax saving bonds
The I-T Act provides a deduction from long-term capital gains if the amount of gains from selling capital assets is invested in certain bonds issued by the National Highway Authority of India (NHAI) and the Rural Electrification Corporation (REC) within six months from the day of the sale. Investment in such bonds cannot be more than R50 lakh in a financial year. Analysts say there was a lot of confusion on the amount of tax deduction on reinvestment in capital gains tax saving bonds in cases where the asset was sold in the second half of a financial year. As a result, some taxpayers claimed a deduction of R1 crore by splitting the investment in two financial years. However, the latest Budget has clarified that such splitting will not be permitted and the total deduction in a financial year cannot exceed R50 lakh.
Long-term capital gains on debt mutual fund
The finance minister has proposed to double the rate of long-term capital gains tax on debt mutual fund to 20% from 10% and also the period of long-term definition from 12 months to 36. The increase in the tenure of the lock-in period will affect those investors who put money in liquid-mutual fund for certain goal-specific investment. The proposed move will bring debt MFs almost at par with bank deposits as the tax arbitrage was being