What is Section 45 of the Income Tax Act?

What is Section 45?

Section 45 of Income Tax Act governs the taxation of capital gains, which arise when a person sells a capital asset. The profits from such sales are considered taxable income under this provision. The section specifies the time at which capital gains become taxable and ensures that income tax is levied on the transfer of ownership of assets.

Additionally, Section 45 of Income Tax Act pertains to life insurance policies, providing guidelines on claim disputes by insurers. The provision states that a life insurance company cannot reject a policy after three years, even if there was non-disclosure of facts.

Exemptions and Reliefs Under Section 45

Several exemptions and reliefs apply under Section 45 of Income Tax Act, allowing taxpayers to mitigate their tax liability on capital gains. Some key exemptions include:

1. Exemptions for Specific Transactions

• Transfers of capital assets under inheritance, gift, or will are not taxable.
• The compensation received from the government for the compulsory acquisition of property is exempt.
• Capital gains from the sale of agrarian land in specified areas are not taxable.

2. Reliefs Available Under Capital Gains Taxation

• Section 54: Exemption on capital gains from selling residential property if those gains are reinvested in a different residential property within the stipulated time.
• Section 54F: Exemption on capital gains from the sale of assets other than residential property, provided the proceeds are used to purchase a new residential house.
• Section 54EC: Exemption when gains are reinvested in specified bonds such as NHAI or REC bonds within six months.
• Section 54B: Exemption for gains from the sale of agricultural land if reinvested in another agricultural land within two years.

For insurance-related exemptions, Section 45 of Income Tax Act ensures that insurers cannot deny claims after three years of a life insurance policy, safeguarding policyholders from undue rejection.

Special Provisions Under Section 45

Some special provisions under Section 45 of Income Tax Act include:

• Compulsory Acquisition of Capital Assets

If a capital asset is acquired compulsorily under any law, capital gains tax applies in the year compensation is received.

• Conversion of Capital Asset into Stock-in-Trade

When a capital asset is turned into stock-in-trade, taxation occurs at the time of sale, with the fair market value on conversion considered for tax computation.

• Insurance Compensation for Destroyed Assets

If a capital asset is destroyed and insurance compensation is received, the gain is taxable in the year of receipt.

• Joint Development Agreements

In joint development agreements, capital gains tax applies in the year the competent authority certifies project completion based on contract terms.

Implications of Non-Compliance

Failure to adhere to Section 45 of Income Tax Act can lead to severe consequences, including:

• Additional tax liabilities due to misreporting of capital gains
• Interest and penalties imposed by the Income Tax Department for non-payment or underreporting
• Legal scrutiny and audits leading to potential litigation

For insurance policies, violating Insurance Act Section 45 can result in:

• Rejection of claims if fraud is detected within the first three years
• Legal action by insurers in case of deliberate misrepresentation

What if the Death of the Insured has Occurred Within 3 Policy Years?

Under Section 45 of Income Tax Act, insurers have the right to question an insurance policy within three years of issuance if misstatement or concealment of material facts is found. However:

• After three years, no policy can be questioned based on misrepresentation
• If the insured passes away within three years, the insurer may assess the policy and return the premiums collected if misrepresentation is detected
• For ULIP, if non-disclosure is found within three years, only the premiums paid until cancellation will be refunded, excluding the fund value
• If misrepresentation occurs within three years of policy revival, the insurer will refund the fund value as of the day before the last revival or return all premiums paid post-revival

Conclusion

Understanding Section 45 of Income Tax Act is essential to manage capital gains effectively and ensure tax compliance. Similarly, Section 45 safeguards policyholders by preventing undue claim rejections after three years. Always maintain accurate financial records and provide complete disclosure when purchasing insurance policies to avoid complications. Proper tax compliance and planning can help you maximize exemptions and prevent legal disputes.

FAQs on Section 45 of Income Tax Act