Amendment to section 55 in finance bill 2023

The amendment to Section 55 of the Income-tax Act, 1961, introduced by the Finance Act, 2023, focuses on clarifying the "cost of acquisition" and "cost of improvement" for certain intangible assets and rights.

Key Changes

The amendment stipulates that for the purpose of calculating capital gains:

• Cost of Acquisition: For self-generated intangible assets or any other self-generated rights (for which no consideration has been paid), the cost of acquisition shall be considered "nil."

• Cost of Improvement: The cost of improvement for any intangible asset or any other right, whether self-generated or acquired, shall be deemed to be "nil."

Implication for Housing Property Acquired as a Gift

The query regarding "housing property acquired as a gift" specifically relates to how capital gains are computed if such a property is later transferred.

• Existing Law (Section 49): For assets acquired through a gift or will, the cost of acquisition to the current owner is typically the cost to the previous owner who actually acquired the asset by purchase. This remains the general rule for physical immovable property (like a house).

• Why the Amendment (Section 55) was introduced: The amendment addresses legal disputes surrounding intangible assets (like TDR, FSI, or other rights) where no purchase cost could be identified. By declaring the cost of "self-generated" intangible rights as "nil," the government aims to ensure these gains are taxable, closing a loophole where courts previously held that if an asset had no ascertainable cost, no capital gains could be computed.

• Impact on Houses: The amendment to Section 55 does not change the method of calculating the cost of acquisition for a standard residential house acquired as a gift. For a house, you still generally look at the cost incurred by the previous owner. It primarily affects intangible assets or "rights" associated with property (like development rights or FSI) rather than the physical structure of the house itself.

Summary

The amendment to Section 55 by the Finance Act, 2023, is designed to ensure that self-generated intangible assets (where no purchase cost exists) are assigned a "nil" cost for capital gains tax purposes. This does not alter the established mechanism for calculating the cost of acquisition for physical residential properties received as gifts, which continues to be based on the cost to the previous owner.