Should You Opt for 12.5% LTCG or 20% Tax on Your Property Sale?
The government's recent amendment to the long-term capital gains tax provision on immovable properties gives homeowners a choice between a lower tax rate of 12.5% without indexation or a higher rate of 20% with indexation.
LtcgTaxProperty SaleReal EstateIndexationCapital Gains TaxReal Estate NewsAug 08, 2024
This amendment is expected to stimulate investment and sales in the housing market by potentially reducing the tax burden on sellers. However, homeowners should remember that the choice between the indexed and non-indexed tax regimes depends on the sale price.
According to Gaurav Karnik, partner and real estate national leader, EY India, homeowners should choose the tax rate that results in the lowest tax liability when selling their property. To decide which rate is better, they should calculate the taxable gain without indexation by deducting the original purchase price from the sale price, and calculate the taxable gain with indexation by deducting the indexed purchase cost, adjusted for inflation using the Cost Inflation Index (CII), from the sale price.
Additionally, the duration for which the property has been held is a crucial factor while choosing between both the tax regime. For short-term holdings, the benefit of indexation may not be significant enough to outweigh the higher tax rate. In such cases, the non-indexed rate of 12.5% might be more beneficial. Long-term holdings, on the other hand, may benefit from indexation, which can considerably increase the cost basis, leading to a lower tax liability even with the higher tax rate of 20%.
Homeowners should carefully assess the impact of indexation on their cost basis against the sale price to identify the tax regime that optimizes their tax outcome. It is also important to consider the tax implications under both regimes and assess whether real estate investment still aligns with their financial goals.
Several experts have weighed in on the implications of this amendment, including Shishir Baijal, Chairman and Managing Director, Knight Frank India, who believes that while the 12.5% rate may seem immediately attractive, the decision to opt for it or the 20% rate with indexation should be made after careful consideration of individual circumstances.
The removal of indexation will lead to higher taxable gains and increased tax liabilities for property owners, as they won't be able to adjust the purchase price for inflation. Long-term property owners will be particularly affected, as the lack of indexation will not account for inflation over the years of ownership.
Individuals planning to sell property inherited in or after July 2024 can still avail the indexation benefits, as the inheritance of property does not constitute a transfer. For the purposes of calculating capital gains, the period of holding and the acquisition cost of the property are considered from the tenure and purchase price of the previous owner.
People who are planning to buy a second property for investment should consider the tax implications under both the indexed and non-indexed regimes. Section 54 of the Income Tax Act, 1961, permits the deduction of costs incurred in acquiring or constructing a new residential property from the capital gains of selling an existing residential house, providing a tax relief that encourages reinvestment.
Several people channelise gains made in shares into real estate, and they still have the options 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.
Overall, the amendment to the long-term capital gains tax provision on immovable properties gives homeowners more flexibility in computing their tax liability. However, it is essential to carefully evaluate the tax implications under both regimes and consider individual circumstances before making a decision.
Frequently Asked Questions
How should homeowners choose which tax rate is better for them?
Homeowners should calculate the taxable gain without indexation by deducting the original purchase price from the sale price, and calculate the taxable gain with indexation by deducting the indexed purchase cost, adjusted for inflation using the Cost Inflation Index (CII), from the sale price.
If a property is bought in 2020 and sold in 2024, what will be the tax liability and which regime should the homeowner opt for?
The tax liability and the choice of regime depend on the sale price. Homeowners should compute the tax liabilities under both the non-indexed and indexed options and select the one that minimizes their tax outlay.
How will the removal of indexation impact property owners wanting to sell their asset after July 2024?
The removal of indexation will lead to higher taxable gains and increased tax liabilities for property owners, as they won't be able to adjust the purchase price for inflation.
If a property is bought and sold the same year, what will be the homeowner’s tax liability and which regime should he opt for?
In the scenario where a property is purchased and sold within the same year, the resulting gain is classified as short-term capital gain, for which indexation benefits are not applicable.
Will a seller who wants to sell a property acquired in 2020 be impacted more than a seller who bought a property in 2010 or in 2024?
The impact depends on the sale price and the duration for which the property has been held. Homeowners must carefully assess the impact of indexation on their cost basis against the sale price to identify the tax regime that optimizes their tax outcome.
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