Long-Term Capital Gains (LTCG) tax plays a significant role when it comes to real estate and home loans. If you plan to sell a property or invest in a new one, understanding the LTCG tax rate is essential. Let us break it down into simpler terms.
What is the LTCG tax rate on property?
The LTCG tax rate is the percentage of your profit that you must pay to the government. Following the recent changes proposed in the Union Budget 2024, the holding period for unlisted financial assets, including gold, silver, and property, has been reduced from 36 months to 24 months. This means that if you sell your property after holding it for 24 months from the purchase date, the capital gains will be considered long term. Additionally, the budget has eliminated the indexation benefit for long-term capital gains (LTCG) on property sales.
Previously, property sellers could account for inflation by adjusting the purchase price, which helped lower their taxable gains, allowing them to pay a 20% tax on the adjusted amount. Under the new taxation rules, this indexation benefit is no longer applicable, meaning sellers cannot adjust for inflation. While the LTCG tax rate has been reduced to 12.5%, this rate now applies without any inflation adjustments. As a result, sellers may encounter higher tax liabilities, despite the lower tax rate, since their gains will be calculated based on the original purchase price without adjustments.
Why is LTCG important for home loans?
When you sell a property, the profit you earn can impact your finances significantly. If you plan to use the profit from selling your old home to purchase a new one, understanding the LTCG tax rate is crucial. This tax applies to the profit made from the sale and can affect how much money you have available for your next home loan.
Step-by-Step Guide to Calculating LTCG on Property Sales
Let us walk through an example to understand how to calculate LTCG on property. The general steps for determining LTCG are as follows:
- Start with the total sale value of the property.
- Deduct any expenses related to the sale.
- Subtract the original cost of acquisition.
- Deduct any costs incurred for improvements made to the property.
- The final amount will be the long-term capital gains from the property.
See the table below for a hypothetical scenario showing how LTCG on property sales is calculated using these steps:
| Particulars | Amount |
| Sale value (A) | Rs. 75,00,000 |
| Less: Transfer expenses (B) | Rs. 1,00,000 |
| Net sale value (A - B) | Rs. 74,00,000 |
| Less: Cost of acquisition (COA) | Rs. 20,00,000 |
| Less: Cost of improvement (COI) | Rs. 15,00,000 |
| LTCG from property sale | Rs. 39,00,000 |
Based on the above example where the LTCG from the sale of the property amounted to Rs. 39,00,000, we will calculate the income tax liability following the latest announcement from the Union Budget 2024, which sets the tax rate on long-term capital gains at 12.5%. Therefore, the income tax liability on an LTCG of Rs. 39,00,000 is Rs. 4,87,500.
Exemptions under LTCG
The Income Tax Act provides several exemptions for long-term capital gains (LTCG) related to property sales, primarily outlined in Sections 54, 54EC, 54B, and 54F. Below are the details of each section:
1. Section 54: Under Section 54, any LTCG that is reinvested in the purchase or construction of a new residential property is exempt from taxation.
2. Section 54EC: Section 54EC states that LTCG reinvested in specified capital gains bonds, such as those issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC), qualifies for a tax exemption.
3. Section 54B: This exemption is applicable when agricultural land, located outside rural areas, is sold, and the capital gains are reinvested in another agricultural land within two years of the sale.
4. Section 54F: Section 54F provides tax relief for capital gains from the sale of long-term assets, excluding residential properties, provided that specific reinvestment conditions are met. To qualify, the entire sale proceeds must be utilised to acquire one or two residential properties within 24 months of the sale.
Impact of LTCG on home loans
Understanding the LTCG tax implications can help you plan better. If you end up paying a large amount in taxes, it may reduce the funds available for your next home loan or investment.
Let us say you sell your property for Rs. 70 lakh after purchasing it for Rs. 50 lakh. After calculating the LTCG and paying the tax, you might find that your net proceeds are less than expected. This reduced amount may affect your home loan application and your ability to purchase a new property.
How LTCG Tax Influences Your Home Loan Eligibility and Planning
To maximise your benefits when dealing with LTCG and home loans, consider the following tips:
1. Calculate your gains: Before selling your property, ensure you understand the potential capital gains tax you might incur. Knowing this can help you make informed decisions about reinvesting the proceeds.
2. Explore exemptions: Always look for exemptions under the Income Tax Act. If you qualify for reinvestment exemptions, you can save on LTCG tax.
3. Consult a financial advisor: If you are unsure about how LTCG affects your finances, consider seeking professional advice. Financial experts can help you navigate the tax implications and home loan options effectively.
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