The recent Union Budget proposed significant changes to the long-term capital gains (LTCG) tax on the sale of property. Earlier, the LTCG tax rate was 20% with the benefit of indexation. The new proposal suggests a reduced rate of 12.5%, but without the indexation benefit.
Meanwhile, the short-term capital gains (STCG) tax rate remains unchanged: gains are added to the taxpayer’s income and taxed at the applicable slab rate. The holding period for determining whether the gain is long-term or short-term also remains unchanged at 24 months.
Understanding the Proposed Changes
The LTCG tax rate reduction to 12.5% without the indexation benefit means that the acquisition cost of the property will not be adjusted for inflation. This change can have different impacts depending on various factors such as the year of property acquisition and the magnitude of gains.
Impact on Long-Term Capital Gains
Let’s examine two scenarios to understand the impact of these changes.
Positive Scenario
Consider a buyer who bought a property in the financial year 2002-03 for Rs 15 lakh and sold it in FY 2024-25 for Rs 1.5 crore. Under the earlier tax regime, the indexed cost of acquisition (assuming a cost inflation index for FY 2024-25) would be Rs 48.75 lakh. The capital gain would be Rs 1.01 crore, and the tax at the rate of 20% would be Rs 20.2 lakh.
With the proposed change, the acquisition cost remains Rs 15 lakh, and the capital gain rises to Rs 1.35 crore. At the rate of 12.5%, the tax would be Rs 16.88 lakh, which is lower than Rs 20.2 lakh under the earlier tax norms.
Negative Scenario
Now, consider a scenario where a person buys a property for Rs 60 lakh in FY 2020-21 and sells it for Rs 85 lakh in FY 2024-25. Under the old norms, the purchase price of Rs 60 lakh would become Rs 69 lakh with indexation. The LTCG would be Rs 16 lakh, and the tax at the rate of 20% would be Rs 3.2 lakh.
Under the proposed norms, the acquisition cost remains Rs 60 lakh, resulting in a capital gain of Rs 25 lakh. Applying the tax rate of 12.5%, the tax bill would be Rs 3.12 lakh, which is higher than Rs 3.2 lakh under the old norms.
Disadvantages of the Proposed Norms
The proposed taxation changes can also be disadvantageous in situations where the inflation-adjusted returns from the property transfer are negative. In such cases, the seller would still have to pay tax at 12.5% on whatever the capital gain is, whereas earlier, no tax would have been paid.
Expert Opinions
Experts believe the impact of the new tax norms will vary based on the year of acquisition and the amount of gains. Archit Gupta, founder and CEO of Clear Tax, says, “For investors with windfall gains in the real estate sector, this amendment will significantly reduce the tax burden, whereas investors who couldn’t benefit from the real estate rally may feel the pinch.”
Despite potential negative impacts in the short term, some believe this move will bring real estate investment on par with capital markets and could increase investment in the sector over time. Adhil Shetty, CEO of Bankbazaar, remarks, “With the indexation benefit gone, the relevance of real estate as an investment will reduce, especially in cities where price rises are modest.”
Grandfathering Clause
In a press conference after the budget, Finance Secretary TV Somanathan clarified that the indexation benefit offered until 2001 would be protected. However, it is unclear if the LTCG on such properties would be taxed at the new rate of 12.5%. Kale suggests that LTCG on properties acquired before April 1, 2001, would likely continue to be taxed at 20% with the indexation benefit.
What Can You Do?
For properties purchased after March 31, 2001, the proposed tax norms seem inevitable. However, there are some exemptions on LTCG that sellers can explore:
- Invest in Capital Gains Bonds: Under Section 54EC, you can invest in these bonds within a stipulated period to avoid paying tax on capital gains.
- Reinvest in Another Residential Property: Under Section 54, reinvest the capital gain in another residential property within a stipulated time frame.
- Use a Capital Gains Account Scheme (CGAS): Deposit the capital gains in a CGAS with a bank until you buy another property or file your tax return for that assessment year.
