How New Tax Rates and Soaring Property Prices Affect LTCG Taxes
Find out how the new tax regime affects real estate investors, and how a spike in property prices can lead to lower LTCG tax payouts.
Ltcg TaxProperty PricesReal EstateTax RegimeIndexation BenefitsReal Estate MumbaiJul 25, 2024
In the past, real estate transactions enjoyed lower effective tax rates due to indexation benefits that adjusted for inflation before levies were made. However, with the new tax regime, the converse is true. Investors who have lower returns from their property would end up paying more than double the existing taxes.
To illustrate this, let's consider an example. Suppose a property worth ₹10 lakh was bought in 2004-05, which has gone up 20 times in value. Under the new regime, the tax bill would be lower for this asset compared to one that has appreciated five times. The reason is that the new LTCG tax rate of 12.5% is more advantageous for real estate sellers who have generated high internal rates of return (IRR).
However, the removal of indexation benefits has also raised concerns about an increase in cash transactions in property transactions. Analysts believe that this move will impact the real estate industry and slow down the resale of residential flats and lands.
The cut-off date for the taxation has been kept at April 1, 2001, with those inheriting or buying property from that date being liable for the revised levy. If a person had inherited or acquired property before April 1, 2001, they will continue to be taxed at fair value.
According to Shishir Baijal, Chairman and Managing Director of Knight Frank India, a property consultancy firm, 'If the property's value has increased more than the inflation rate, the new 12.5% tax rate is expected to be more advantageous for real estate sellers compared to the previous 20% tax rate after adjusting for indexation.'
On the other hand, Pankaj Kumar, Vice President of Fundamental Research at Kotak Securities, believes that the new capital gains tax structure for real estate favours investors who have generated high IRRs, while investors with poor IRRs would be worse off in the new regime.
In conclusion, the new tax regime has brought about significant changes to the real estate industry, and investors need to be aware of the implications of these changes on their tax payouts.
Frequently Asked Questions
What is the new LTCG tax rate for real estate?
The new LTCG tax rate for real estate is 12.5%.
How does the removal of indexation benefits affect real estate investors?
The removal of indexation benefits means that investors who have lower returns from their property would end up paying more than double the existing taxes.
What is the cut-off date for the new tax regime?
The cut-off date for the new tax regime is April 1, 2001.
How does the new tax regime affect investors with high IRRs?
The new tax regime favours investors who have generated high internal rates of return (IRR) as they will pay lower taxes.
What is the concern about the removal of indexation benefits?
The concern is that the removal of indexation benefits will lead to an increase in cash transactions in property transactions.
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