Amendments of ‘Capital Gains’ in Finance Bill 2020

Home   /   Amendments of ‘Capital Gains’ in Finance Bill 2020

1. Amend towards Rationalisation of Provisions in respect of Segregated Portfolio of MFs in Finance Bill 2020 –

[Applicable from Assessment Year 2021-22]

Mutual Funds generally hold debts and money market instruments of different companies and NBFC’s. Upon downgrade event [means a Party’s or Party’s Guarantor’s Credit Rating fails to meet the Ratings Limit] it become very tough for the Mutual Funds to continue trading its unit. Therefore, SEBI has permitted the Mutual Funds to segregate its one scheme units into two or more schemes units. Now following question arises in such a situation:

  1. What will be the period of holding for segregated units?
  2. How to calculate cost of acquisition for segregated and original units?

The ‘period of holding’ is the period for which an asset is held by the owner before its transfer. The period of holding of every capital asset is determined so as to classify it into short-term capital asset or long-term capital asset. The period of holding of a capital asset is calculated from the date of its purchase or acquisition till the date of its transfer.
Section 2(42A) does not specify the method of calculating the period of holding of above segregated units. So the Finance Bill, 2020 proposes to amend the provision to include the above instance. The period of holding of a capital assets being unit or units in a segregated portfolio shall include the period for which the original unit or units in the main portfolio were held by the assessee.

Capital gains are computed by reducing cost of acquisition from the full value of consideration of the capital asset. Generally, cost of acquisition of a capital asset is the cost incurred in acquiring the capital asset. It includes the purchase consideration plus any expenditure incurred exclusively for acquiring the capital asset. The method for determination of cost of acquisition in case of segregated units has been proposed to be inserted in Section 49.

It has been proposed in Section 49(2AG) that cost of acquisition of a unit in the segregated portfolio shall be the amount which bears to the cost of acquisition of a unit held by the assessee in the total portfolio, the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios.

Further, a new Section 49(2AH) has been proposed that the cost of the acquisition of the original units held by the unit holder in the main portfolio shall be deemed to have been reduced by the amount so arrived as per Section 49(2AG).

Let’s understand the above amendment with an example:

Portfolio before Credit Event (Downgrade)

Name of InstrumentQuantityMarket Value% to AUM (Asset Under Management)
A
1005,0005%
B10020,00020%
C10030,00030%
D (Defunct Co.)20040,00040%
Cash & Equivalent 5,0005%
Total1,00,000
Unit of Mutual Fund10,000 
NAV10 

Main Portfolio (After Segregation)

Name of InstrumentQuantityMarket Value% to AUM (Asset Under Management)
A
1005,0008.33%
B10020,00033.33%
C10030,00050%
Cash & Equivalent 5,0008.33%
Total60,000
Unit of Mutual Fund10,000 
NAV6 

Segregated Portfolio (Before information reaches the market)

Name of InstrumentQuantityMarket Value% to AUM (Asset Under Management)
D20040,000100%
Total40,000
Unit of Mutual Fund10,000 
NAV4 

Segregated Portfolio (After information reaches the market)

Name of InstrumentQuantityMarket Value% to AUM (Asset Under Management)
D20010,000100%
Total10,000
Unit of Mutual Fund10,000 
NAV1 

Example, if in the above case, Mr. A, who bought 1,000 units of original scheme at a price of Rs. 8 per unit 1 year prior to credit downgrade event and he sells all of his units after 2 year of credit event at Rs. 8 per unit (original units) and Rs. 1.5 per unit (segregated units). The capital gain from these units shall be calculated in the following manner:

ParticularsOriginal Units (I)Segregated Unit (II)
No. of Units Purchased (A)1,000NA
No. of Units received due to Segregated (B)1,000
Purchased Price (C)Rs. 8
NAV immediately before Segregated (D)Rs. 6Rs. 4
Cost of Acquisition of Segregated Units (E) : [ E = A(I) * C(I) * D(II) / (D(I) + D(II))]Rs. 3,200 [ 1,000 units * Rs.8 * Rs.4 / (Rs.6 + Rs.4)]
Cost of Acquisition of original Units (F) :  [F=C*A(I) – E(II)]Rs.4,800 [Rs.8 * 1,000 units – Rs.3,200]
Period of Holding3 years3 years
Sale Price per Unit (G)Rs. 8Rs. 1.5
Total Sale proceeds (H) : [ H=G*A or B, as the case may be]Rs. 8,000Rs. 1,500
Capital Gain / (Loss) (I) :
[I = H -E OR F , as the case may be]
Rs. 3,200( Rs. 1,700)

2. Amend of Fair Market Value (FMV) of Land or Building Purchased before 01-4-2001 in Finance Bill 2020

[Applicable from Assessment Year 2021 -22]

Section 55 of the Income-tax Act provides that where a capital asset, being a land or building or both, is purchased before 01- 04-2001, fair market value of such property as on said date can be taken as its cost of acquisition.
The Finance Bill, 2020 proposes to amend the said section to provide that the fair market value cannot exceed the stamp duty value of property as on 01-4-2001 for the purpose of calculation of cost of acquisition under this section.

3. Amend of Safe Harbour limit of 5% increased to 10% in case of Sale of Immovable Property in Finance Bill 2020

[Applicable from Assessment Year 2021-22]

Section 50C lays down special provision for determination of full value of consideration in case of transfer of land or building. As per said provision, where the consideration received/accrued is less than the stamp duty value (SDV) adopted by the state government, then such stamp duty shall be deemed to be the full value of consideration.
However, this provision shall not apply if the value adopted for the payment of stamp duty does not exceed 105% of the consideration received. The Finance Bill, 2020 proposes to extend the Tolerable Limit from 105% to 110%. Similar amendments have been made in Section 43CA and Section 56(2)(x).

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