Long Term Capital Gain Tax on Property

After the latest changes proposed in the Union Budget 2024, the holding period for unlisted financial assets, such as gold, silver, and property, has been lowered from 36 months to 24 months. This implies that if you sell your property after 24 months from the date of purchase, the capital gains will be classified as long-term. Also, the budget has removed the indexation benefit for long-term capital gains (LTCG) on property sales.

Previously, property sellers could adjust the purchase price for inflation, reducing their taxable gains, and pay 20% tax on these adjusted gains. With the new taxation rules, this indexation benefit is no longer available and sellers cannot adjust for inflation. However, the LTCG tax rate has been lowered to 12.5%, but this rate applies without any inflation adjustment. Consequently, sellers might face higher tax liabilities despite the reduced tax rate, as their gains will be calculated on the unadjusted purchase price.

For a better understanding, let us learn how to calculate LTCG on the sale of property and check out the various available exemptions as per the Income Tax Act

What are capital gains on the sale of property?

Capital gains arise when a property is sold for a profit compared to its purchase price. This profit is subject to taxation in many jurisdictions. Factors influencing the tax liability include:

• Holding period: Short-term gains (held for a specific period) are often taxed at a higher rate than long-term gains.
• Type of property: Different property types (e.g., residential, commercial) may have varying tax implications.
• Exemptions and deductions: Certain exemptions and deductions can reduce the taxable capital gains.

Understanding these factors is crucial for property owners and investors to accurately calculate their tax obligations

Long-term capital gain tax on property

Long-term capital gains arise from the sale of property held for more than 24 months. For property transfers made on or before July 22, 2024, the applicable long term capital gain tax rate is 20% after availing the indexation benefit. For transfers occurring after this date, the tax rate will be reduced to 12.5%, but without the indexation benefit. Certain exemptions may be available to help reduce the taxable amount on your LTCG.

Additionally, for land or building sales after July 23, 2024, taxpayers can choose between paying 20% tax with indexation benefits or 12.5% without indexation if the property was acquired on or before July 22, 2024.

New long-term capital gains (LTCG) tax rules on property

The Budget 2024 announced a significant change in how long-term capital gains (LTCG) from the sale of property are taxed. Previously, the gains were taxed at 20% with the benefit of indexation. Indexation allowed sellers to adjust the purchase price of their property for inflation, which reduced the taxable gains.

Under the new rules, the LTCG tax rate is reduced to 12.5%, but the indexation benefit is removed for the investors who buy property after July 23, 2024. This implies sellers can no longer inflate their purchase price to reduce capital gains.

For example, let us assume Mr. X bought a property for Rs. 25 lakh in FY 2002-2003 and sold it for Rs. 1 crore in FY 2023-2024. Under the old rules, he would adjust the Rs. 25 lakh purchase price for inflation using the Cost Inflation Index (CII), which would have reduced his taxable gains. However, under the new rules, he simply subtracts the purchase price from the sale price. This results in a capital gain of Rs. 75 lakh, which is taxed at 12.5%.

Investors who have bought real estate before July 23, 2024 will now have an option to choose between a lower tax rate without indexation or a higher rate with indexation.

Additionally, for properties bought before April 1, 2001, sellers can choose the higher of the actual purchase price or the property's fair market value as of April 1, 2001, as their purchase price. This ensures they get the most beneficial calculation for their capital gains tax.

When is a capital gain from property deemed to be long term?

The Income Tax Act of 1961 categorizes immovable properties held for more than 24 months as long-term capital assets, subject to Long-Term Capital Gains (LTCG) tax. However, a longstanding challenge in tax computation arose from the absence of a specific provision to determine the acquisition date of immovable property, particularly under-construction properties. This ambiguity created uncertainty regarding the appropriate tax treatment for such assets.

How to calculate the long-term capital gains on property

To understand the calculation of LTCG on property, you need to be familiar with the following terms and metrics.

• Full value of consideration
  In simple terms, this is the sale value of the house property. It includes consideration received in cash and/or kind.
• Expenses on transfer
  This includes any direct or indirect expenses you may incur during the sale. They are subtracted from the sale value.
• Cost of acquisition
  This is the cost at which you purchased the house property.
• Cost of improvement
  This term refers to the expenses you incurred during the holding period to make any changes, upgrades and improvements to the house property.

Example of calculation of LTCG on property

Let us discuss an example for the calculation of LTCG on property. The general process for computing the LTCG is as follows:

Step 1: Begin with the full value of consideration i.e. the sale value.

Step 2: Subtract the expenses incurred during the sale.

Step 3: Subtract the cost of acquisition.

Step 4: Subtract the cost of improvement.

Step 5: Arrive at the long-term capital gains on the house property.

Check out the table below for a hypothetical example of how the LTCG on property sales is calculated using the above-mentioned steps:

What are tax exemptions on long-term capital gains on property sales?

The Income Tax Act offers relief on the LTCG tax in section 54 and section 54F. Check out the details below.

Section 54

Section 54 says that the amount of LTCG that is reinvested in the purchase or construction of a new residential property is exempt from tax.

Section 54EC

Section 54EC says that the amount of LTCG that is reinvested in capital gains bonds issued by bonds issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC), among others, is exempt from tax.

Section 54B: Exemption for reinvested agricultural land

This exemption applies if you sell agricultural land located outside rural areas and reinvest the capital gains in another agricultural land within two years of the sale. You have until the filing deadline for your tax return for the relevant financial year to reinvest the capital gains. An alternative option exists: deposit the capital gains amount in a bank and reinvest it within two years. This prevents the gains from becoming short-term, which would disqualify them from the exemption. If you sell the newly acquired agricultural land within three years of purchase, the tax exemption on the original sale may be revoked.

Capital Gain Tax Exemptions under Section 54, 54F, 54EC, and 54GB

Section 54F: Exemption for reinvested capital gains

This section offers tax exemption for capital gains from selling long-term assets (excluding residential properties) under specific reinvestment conditions. The entire sale proceeds must be used to purchase one or two residential properties within 24 months of the sale. Alternatively, the capital gains and sale proceeds can be used for a residential construction project, provided construction is completed within three years of the sale date. If you don't reinvest the entire sale proceeds, the tax exemption will only apply proportionally to the reinvested amount, not the entire capital gain.

Long term capital gain tax rule for different categories

When selling a property held for more than 36 months, Indian taxpayers have two options for calculating long-term capital gains tax:

1. 12.5% tax rate without Indexation: This option allows for a lower tax rate of 12.5% on the capital gains. However, it does not account for inflation, which can impact the real purchasing power of the original investment.
2. 20% tax rate with Indexation: This more traditional approach involves a higher tax rate of 20%. However, it provides taxpayers with the opportunity to adjust the property's purchase price for inflation using the Cost Inflation Index (CII) published by the Central Board of Direct Taxes. This adjustment can significantly reduce taxable capital gains and, consequently, the overall tax liability.

Note: The choice between these options depends on individual circumstances, including the length of ownership, inflation rates, and the specific tax implications for the taxpayer. It is advisable to consult with a tax professional to determine the most advantageous approach based on your unique situation.

How to save on Capital Gains Tax while selling your property?

Capital gains refer to the profit made from selling property in India, which is subject to capital gains tax under income tax laws. While most properties are considered capital assets, agricultural land is an exception, and any profit from its sale is not classified as a capital gain.

The Government of India taxes you on the capital gain, which is calculated by subtracting the purchase cost of the asset from its sale price. There are two types of capital gains, and the tax rates differ depending on the type. Below is more information on how you can reduce or save on capital gains tax when selling property.

Important points

Key points from expert statements on the recent tax changes affecting capital gains from property sales:

• Choice of tax regimes: Taxpayers can now choose between a 12.5% tax rate without indexation or a 20% rate with indexation for long-term capital gains from property sales acquired before July 23, 2024.
• Grandfathering provision: The new rules act as a grandfathering provision for properties acquired before July 23, 2024, providing flexibility in tax planning.
• Tax liability calculation: The government will determine the applicable tax regime based on calculated figures, ensuring fairness and transparency.
• No loss offset: If the Old Tax Regime results in a negative financial outcome, taxpayers cannot offset this loss under the New Tax Regime.
• Balancing tax revenue and taxpayer concerns: The government aims to strike a balance between generating sufficient tax revenue and addressing taxpayers' concerns about the removal of indexation benefits.
• Impact on real estate market: The new tax regime is expected to stimulate investment and sales in the housing market by potentially reducing the tax burden on sellers.
• Flexibility for homeowners: The choice between tax rates offers flexibility for homeowners to select the option that best suits their individual financial circumstances and property appreciation.
• Potential benefits: In cases where property appreciation exceeds inflation, the 12.5% tax rate without indexation might be more advantageous. However, indexation can be beneficial if property appreciation is closer to the inflation rate.
• Boost to affordable housing: The revised tax regime is expected to boost the growth of the affordable housing sector by eliminating concerns over increasing project costs.
• Rollover benefits remain intact: Taxpayers can still avail of rollover benefits under Sections 54, 54F, and 54EC for investing capital gains in residential real estate to avoid taxation.
• Positive Impact on Homeowners and Buyers: The new tax regime is anticipated to have a positive impact on both homeowners and aspiring homebuyers.

Conclusion

This sums up the fundamentals of LTCG on property sales and how the gains are taxed. Keep in mind that the sale or redemption of any capital asset can result in LTCG. This includes mutual funds as well.

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