If you bought a property in or after 2001 and plan to sell it now, you may find yourself paying more tax, especially after the new proposals introduced on July 23. Budget 2024. has reduced tax rates on capital gains earned from sale of house properties held for long term, but has removed the indexation benefit available to taxpayers. The long-term capital gains (LTCG) has been reduced from 20% with indexation benefit to 12.5% without indexation for the real estate sector.
The indexation benefit allowed taxpayers to compute gains arising out of sale of a property after adjusting inflation. This resulted in major tax savings but that may not be possible any more for properties bought after 2001. Having said that, the government has retained the indexation benefit for taxpayers on properties bought or inherited before 2001.
What Budget 2024 has attempted to do is to rationalise the LTCG taxes across asset classes, bringing equity, debt, gold and real estate on an equal footing. The changes in the tax rate have been made effective from July 23, 2024.
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Tax experts said that this may have an impact on property sellers. “Real estate sellers benefited from inflation adjusted indexation. In the event of a property owner selling his long-term capital asset, a LTCG of 20% would kick in after taking the benefit of indexed cost of acquisition and improvement. Other than indexation, the rate was 10%. Budget 2024 has removed this benefit of indexation and the rate of LTCG without indexation has been increased from 10% to 12.5%,” said Vivek Jalan, Partner, Tax Connect Advisory.
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To cite an example, if a property was purchased in FY2019-20 for Rs.1 crore and sold after 5 years in FY 24-25 for Rs.1.25 crore. In such a case the indexed cost of acquisition would be Rs.1.25 crore and hence there would be NIL LTCG. However, from July 23 2024, LTCG would be 12.5% on ₹25 lakh, which comes up to Rs.3.12 lakh. Now consider that the person purchased another property in another place in FY 2009-10 for the same cost of Rs.1 crore. Due to abysmal market conditions the sale price was Rs.1.25 crore. Even in such a case the same LTCG of Rs.3.12 lakhs would be applicable. “Hence, this amendment is considering unequal taxpayers as equals, which may not be the intent of the amendment from what it seems upfront,” said Jalan.
Jaxay Shah, former president of real estate body Credai, is of the view that for home buyers, the new LTCG rates are tax neutral. “While the government has removed the indexation benefits, they have retained the benefits under Section 54. This means that if a homeowner sells their property and incurs capital gains, they can avoid paying any capital gains tax by reinvesting those gains in a new house,” he said.
Here’s an attempt to answer a few questions that property sellers may have.
1 How will removal of indexation impact property owners wanting to sell their asset?
The removal of indexation from the calculation of capital gains tax on property sales can have significant implications for sellers, depending on when the property was acquired.
“Indexation allows for the adjustment of the purchase cost of an asset for inflation over the period of ownership, effectively reducing the capital gain and the associated tax liability upon sale. Without indexation, the original purchase cost is used, leading to a potentially higher capital gain and increased tax burden,” explains Gaurav Karnik, Partner and Real Estate National Leader, EY India
2 Impact on sellers based on the year the property was acquired
Will a seller who wants to sell a property acquired in 2001 be impacted more than a seller who bought a property in 2010 or in 2020?
Sellers who acquired their properties in 2001 are likely to experience the maximum increase in taxable capital gains due to the removal of indexation. The lack of adjustment for nearly two decades of inflation will result in a significant disparity between the original purchase cost and the current sale price, leading to a higher tax liability, explains Karnik.
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According to Rohit Chopra of SouthDelhiPrime Properties, people wanting to sell properties acquired or inherited earlier may be encouraged to go in for joint ventures and collaborations to mitigate the impact. They will lose out on 3.63 times indexation but save 37.5% on LTCG, he said, adding such property owners may use the market momentum to exit after two years once new homes or apartments are developed on the plot.
Property acquired in 2010: Sellers of properties bought in 2010 will also face an increase in taxable capital gains, but the impact will be less than for properties acquired in 2001. The inflationary period is shorter, reducing the gap between the indexed cost and the sale price, though the tax increase will still be noticeable, Karnik said.
Property acquired in 2020: The impact of removing indexation for properties acquired in 2020 will be minimal. The short duration between purchase and sale means that inflation has had less time to affect the property’s cost base, resulting in a smaller increase in taxable capital gains, said Karnik.
Having said that, sellers who bought property in 2020 would ‘benefit’ the most relative to the other two scenarios/ period, but this is not an actual financial advantage to the seller, rather it’s simply that they would experience the least negative impact from the removal of indexation. They would have the smallest increase in capital gains on account of removal of indexation due to the short period between purchase and sale, meaning the lack of indexation would not add much to their tax burden compared to the other sellers who held their properties for longer periods, explains Karnik.
3. How will people planning to sell their parental property inherited in or after 2001 be impacted?
For individuals planning to sell inherited property (acquired from parents after 2000), the removal of indexation can lead to a higher tax liability. Succession planning should account for this increased tax cost when considering the timing and method of property transfer, said Karnik.
4 What should people who are planning to buy a second property for investment do now?
To effectively navigate capital gains tax obligations, individuals or Hindu Undivided Families may leverage the provisions of Section 54 of the Income Tax Act, 1961. This section provides for the deduction of the cost incurred in purchasing and/or constructing a new residential property from the capital gains arising from the sale of land or building being a residential house. Such a measure provides a tax-relief opportunity, facilitating a more advantageous reinvestment of sale proceeds and a potential decrease in the tax burden, explains Karnik.
It is important to recognize, however, that the removal of indexation benefits can result in a higher amount of capital gains, thereby imposing an additional obligation on individuals/ HUF to invest more funds in the new property to fully utilize the deduction available under Section 54. The limit of investment under section 54 is ₹10 crore, adds Karnik.
5 Several people channelise gains made in shares into real estate – what are the options available for them?
In light of the recent Budget 2024 proposal which has led to the removal of indexation, individuals and HUFs still have the opportunity to invest in residential house property to avail tax benefits on capital gains tax on sale of non-residential assets (including shares) under Section 54F of the Income Tax Act, 1961. However, with the discontinuation of indexation, the capital gains calculated on the sale of non-residential assets (including shares) are expected to be higher, since the cost of acquisition will remain static and not adjusted with CII. This change implies that to leverage the full potential of the deduction under Section 54F (limit is ₹10 crore), individuals might find themselves needing to invest a more significant sum in the new residential property than what would have been necessary prior to the change, adds Karnik.
6 What will be the impact on luxury properties worth more than ₹10 crore?
This is important considering that the government had in Budget 2023 set a ceiling of ₹10 crore for the long-term capital gain tax deduction for reinvestment in residential properties under Section 54 and 54F of the Income Tax Act.
According to Hemal Mehta, partner, Deloitte India, the impact certainly will be higher as properties worth more than ₹10 crore do not get the full cover of exemption u/s 54 or 54F. What this means is that the sellers of these properties are in any case liable to pay capital gains. Now with the indexation benefit done away with, the seller would have to compute the tax liability at 12.5 % vis-a-vis 20% (as earlier) and see what’s the additional cost of going ahead with the transaction.
7 Will it lead to High Networth Individuals investing in foreign shores?
Real estate experts say that it may not entirely lead to exodus of investment, as is being suspected. There are various scenarios that need to be carefully understood. The tax incidence under the new system of 12.5% plus surcharge and cess without indexation might be lower in some cases, for instance, where the property is purchased in 2001 and sold at a multiple of eight times or more. In such cases, the new system may allow lower capital gains tax.
“Of course, it is understood that the proposed changes in Budget 2024 could prompt some to consider investing in properties overseas. It needs to be remembered though, that investing abroad entails several factors, including legal frameworks, economic stability, and currency risks. Government policies can influence investor behavior and reactions to tax changes often vary based on individual circumstances and broader economic conditions,” said Arvind Nandan, Managing Director, Research and Consulting, Savills India.
Akash Puri, India Sotheby’s International Realty, is of the view that the reduction in the tax rate might make domestic property investments more attractive, potentially curbing the trend of investing in properties abroad. However, individual investment decisions will still depend on a range of factors, including market conditions, returns on investment, and personal financial goals.
“While the reduced tax rate could incentivize more investments within India, it’s essential to consider various factors, including foreign market conditions, currency exchange rates, and local property laws, before making any investment decisions,” he added.
