Analysis of Finance Bill 2021 – Direct Tax Proposals
Analysis of Finance Bill 2021 – Direct Tax Proposals
|
Tax Rates |
FB Clause | 2 |
|
IT Act Section |
4 | |
|
Effective from |
AY 2021-22 / AY 2022-23 |
|
|
Tax Rates No change |
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| Depreciation on Goodwill | FB Clause | 3(i), 7, 18, 20 |
| IT Act Section | 2(11), 32, 50, 55 | |
| Effective from | AY 2021-22 | |
| Old law | Smif Securities Limited (2012) 348 ITR 302(SC):
The expression “any other business or commercial rights of similar nature” admits “goodwill of a business or profession”. Hence depreciation is allowed on “goodwill”. |
|
| New law | Section 2(11) and 32:
“not being goodwill of business or profession” inserted in the language. Hence depreciation is not allowed. Section 50: If the goodwill forms part of a block of the asset as of 01.04.2020, the WDV of the block and short-term capital gain shall be determined in a prescribed manner. Section 55: If the assessee has already claimed depreciation on purchased goodwill up to AY 2020-21, the cost of goodwill shall be taken to be the purchase price (-) depreciation claimed up to AY 2020-21 for the purpose of computing capital gain at the time of subsequent sale. |
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| Comment | Reasons for the amendment are:
• Many corporates were mis-using depreciation benefits by creating goodwill in amalgamations, etc. • In general, Goodwill appreciates and does not depreciate. |
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| Taxation of ULIP | FB Clause | 3(ii), 5(c), 14(a), 29 |
| IT Act Section | 2(14), 10(10D), 45(1B), 112A | |
| Effective from | 01.02.2021 | |
| Section | Old law | New law |
| 10(10D) | The amount received under a life insurance policy (including bonus) is exempted. Hence amount received under Unit Linked Insurance Policy (ULIP) is also exempted. | The exemption shall not apply with respect to any ULIP, issued on or after 01.02.2021 if the premium payable for any of the previous years during the term of such policy exceeds Rs. 2,50,000.
In case of multiple ULIPs, the exemption shall be allowed u/s 10(10D) with respect to those ULIPs, only if the aggregate premium payable does not exceed Rs. 2,50,000 in any of the previous year during the term of any of those policies. Alert: If the sum is received on death, the exemption shall be allowed. |
| 2(14) | — | ULIP which is not exempted u/s 10(10D), has been included in the definition of “capital asset”. |
| 45(1B) | — | Profit or gain arising from receipt from ULIP which is not exempted u/s 10(10D) [including the amount allocated by way of bonus on such policy], then, shall be chargeable under the head “Capital gains” in the previous year in which such amount was received and the income taxable shall be calculated in such manner as may be prescribed. Section 48 shall not apply. |
| 2(42A) | The proviso to section 2(42A):
A unit of “equity oriented fund” shall be short-term, if it was held by the assessee for not more than 12 months immediately preceding the date of its transfer. Explanation-4 to section 2(42A) prescribes that the meaning of “equity oriented fund” shall be the same as in Explanation to section 112A. |
No change. This will apply. |
| Explanation to section 112A | — | “Equity oriented fund” – amended to include “ULIPs not exempted u/s exempted u/s 10(10D) which has suffered STT” |
| Explanation to section 111A | “Equity oriented fund” shall have the same meaning as in Explanation to section 112A | No change. This will apply |
| Finance (No. 2) Act, 2004 | — | Finance (No. 2) Act, 2004 also amended: STT shall be levied on maturity or partial withdrawal of ULIPs not exempted u/s 10(10D). |
| Let us conclude … | ||
| • High premium ULIPs taken on or after 01.02.2021 shall not get the benefit of exemption u/s 10(10D).
• The resultant profit shall be taxable as Capital Gain. • The capital gain shall be short-term or long-term on the basis of 12 months holding. • STCG shall be taxable u/s 111A. • LTCG shall be taxable u/s 112A. |
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