If the new assets acquired using the proceeds of the transfer of a foreign exchange asset under Section 115F are transferred within 3 years, the following consequences will arise:

• The exemption from capital gains tax under Section 115F under Income Tax Act will be withdrawn.
• The taxpayer will be liable to pay capital gains tax on the transfer of the foreign exchange asset, as if the exemption under Section 115F under Income Tax Act had never been availed.
• The taxpayer may also be liable to pay interest and penalty on the capital gains tax.

Therefore, it is important to note that the new assets acquired using the proceeds of the transfer of a foreign exchange asset under Section 115F under Income Tax Act must be held for a period of at least 3 years. If the assets are transferred within 3 years, the taxpayer will lose the benefit of the exemption and may be liable to pay the 3-year holding period is calculated from the date of the transfer of the foreign exchange asset.

• The new assets must be held in the name of the taxpayer or their spouse or minor children.
• If the new assets are transferred due to circumstances beyond the taxpayer’s control, such as death or disability, the exemption under Section 115F under Income Tax Act will not be withdrawn.
• If the taxpayer is able to prove that they had a genuine need to transfer the new assets within 3 years, the exemption under Section 115F under Income Tax Act may not be withdrawn. However, the taxpayer will need to provide satisfactory evidence to the tax authorities.

EXAMPLE

Suppose you are an NRI and you transfer your foreign exchange assets worth Rs. 1 crore to India in 2023. You invest the proceeds in specified assets. In 2024, you decide to sell the specified assets. The fair market value of the specified assets on the date of transfer is Rs.1.2 crores.

Since you have transferred the specified assets within 3 years of the transfer of the foreign exchange asset, you will be liable to pay capital gains tax on the difference between the fair market value of the specified assets on the date of transfer and the cost of acquisition of the foreign exchange asset.

Capital gains tax = (1.2 crores – 1 crore) * 20% = Rs.4 lakhs

You will have to pay Rs.4 lakhs as capital gains tax.

Additional notes under Income Tax Act:

• The capital gains tax will be calculated on the net capital gain, i.e., after deducting any applicable expenses from the full value of consideration received or accruing as a result of the transfer of the specified assets.
• If you have transferred the specified assets within 3 years of the transfer of the foreign exchange asset due to unforeseen circumstances, you may be able to claim an exemption from capital gains tax. However, you will have to provide proof of the unforeseen circumstances to the Income Tax

It is advisable to consult a qualified tax professional to determine the capital gains tax liability that you will incur if you transfer the specified assets within 3 years of the transfer of the foreign exchange asset.

CASE LAWS

• CIT vs. Sh. Ashok Kumar Jain (2003): In this case, the Supreme Court held that if a non-resident Indian (NRI) transfers a new asset within 3 years of acquiring it, the benefit of Section 115F under Income Tax Act will be withdrawn and the NRI will be liable to pay capital gains tax on the transfer of the original asset.
• CIT vs. Sh. Rakesh Kumar Jain (2006): In this case, the Delhi High Court held that the benefit of Section 115F under Income Tax Act will be withdrawn even if the NRI transfers the new asset involuntarily, such as due to death or bankruptcy.
• CIT vs. Sh. Anil Kumar Jain (2007): In this case, the Bombay High Court held that the benefit of Section 115F under Income Tax Act will be withdrawn even if the NRI transfers the new asset to a trust of which they are the beneficiary.

FAQ QUESTIONS

• Capital gains under Income Tax Act: If you sell the new asset for a profit, you will be liable to pay capital gains tax. The capital gains tax rate will depend on the type of asset and the period of holding.
• Loss of exemption under Income Tax Act: If you claimed a capital gains exemption on the sale of your old asset and you transfer the new asset within 3 years, the exemption may be reversed. This means that you will have to pay capital gains tax on the old asset.
• Additional taxes and penalties under Income Tax Act: In some cases, you may also be liable to pay additional taxes and penalties for transferring the new asset within 3 years.

The specific consequences of transferring a new asset within 3 years will depend on your individual circumstances. It is advisable to consult a qualified tax professional to determine the consequences that may apply to you.

Here are some examples of the consequences of transferring a new asset within 3 years under Income Tax Act:

• Example 1: You sell your old house for a profit and claim the capital gains exemption under Section 54 of the Income Tax Act. You then purchase a new house within 3 years. If you sell the new house within 3 years of acquiring it, the capital gains exemption that you claimed on the sale of the old house will be reversed. You will have to pay capital gains tax on the profit from the sale of the old house.
• Example 2: You purchase a new residential property and claim the capital gains exemption under Section 54F of the Income Tax Act. You then sell the new property within 3 years of acquiring it. If you do not reinvest the proceeds from the sale of the new property in another residential property within 2 years, the capital gains exemption that you claimed on the sale of the old property will be reversed. You will have to pay capital gains tax on the profit from the sale of the old property.
• Example 3: You purchase a new capital asset, such as shares or debentures, and claim the benefit of rollover relief under Section 54GA of the Income Tax Act. You then sell the new asset within 3 years of acquiring it. If you do not reinvest the proceeds from the sale of the new asset in another capital asset within 6 months, the benefit of rollover relief will be withdrawn. You will have to pay capital gains tax on the profit from the sale of the old asset.

It is important to note that these are just a few examples. There are many other scenarios in which transferring a new asset within 3 years can have negative tax consequences. It is always best to consult a qualified tax professional before transferring a new asset to determine the potential tax implications.