How LTCG Tax Regime Change Impacts Your Property Investments
Finance Minister Nirmala Sitharaman's recent announcement on eliminating indexation benefits on non-financial assets, including real estate, has sparked controversy and questions among investors.
LtcgReal EstateTax RegimeIndexation BenefitsCapital Gains TaxReal EstateJul 24, 2024
The elimination of indexation benefits will impact investors who sell their properties and reinvest in other asset classes. It will also affect shorter-term investments (less than 5 years) where market price growth is above 10% per year. On the other hand, investments with longer holding periods (more than 10 years) and moderate property price appreciation (less than 10% per year) may not be significantly impacted.
Global brokerage firm CLSA has explained various scenarios involving property appreciation for different holding periods. According to their analysis, taxpayers will pay significantly more tax in the new regime if property prices increase at a moderate rate. For instance, if property prices appreciate at 5% CAGR for two years, taxpayers will pay 1,000% more tax in the new regime compared to the old regime. Similarly, they will pay 754% more tax for holding a property for five years and 238% more for 10 years.
On the other hand, if property prices appreciate at a higher rate, taxpayers may actually save on taxes. For instance, if property prices rise at 12.5% CAGR annually, taxpayers will save 2% on a holding period of two years, 8% on a holding period of five years, and 19% on a holding period of 10 years.
Tax experts have also weighed in on the implications of the change. Preeti Sharma, Partner, Global Employer Services, Tax & Regulatory Services, BDO India, has explained a scenario where a property is sold in FY25 for Rs 1.2 crore. The property was acquired in FY11 for Rs 40 lakh. In this scenario, the net tax outgo in the old regime comes to around Rs 6,61,078, while in the new regime it is calculated to be Rs 10,00,000. Thus, with no indexation benefit, the tax liability is Rs 3,38,992 more on the taxpayer, which is about 51% higher than the previous regime.
Kotak Institutional Equities has also stated that the impact on end-user decision making to buy new homes would be negligible since the home is purchased for personal consumption. However, for investors, the impact of the tax change would be case-specific and dependent on the price appreciation of the underlying property relative to the index and the holding period.
The change in the LTCG tax regime is likely to have a significant impact on the real estate sector, particularly for investors. While it may not affect end-users significantly, it may lead to a change in the behavior of investors and affect the overall demand for properties.
Frequently Asked Questions
What is the impact of the LTCG tax regime change on short-term investments?
The change will impact shorter-term investments (less than 5 years) where market price growth is above 10% per year, leading to a higher tax liability.
How will the elimination of indexation benefits affect property investors?
The elimination of indexation benefits will impact investors who sell their properties and reinvest in other asset classes, leading to a higher tax liability.
What is the impact of the change on end-users who buy properties for personal consumption?
The impact on end-user decision making to buy new homes would be negligible since the home is purchased for personal consumption.
How will the change affect properties with high price appreciation?
If property prices appreciate at a higher rate, taxpayers may actually save on taxes in the new regime.
When does the change in the LTCG tax regime come into effect?
The change comes into effect immediately, starting from July 23, 2024.
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