Tax Relief for Real Estate Investors: Govt Offers Choice Between Old and New LTCG Regimes
Real estate investors can now choose between old and new long-term capital gains (LTCG) regimes, offering relief on tax liability.
Real EstateTax ReliefLtcgLong Term Capital GainsIndexation BenefitsReal Estate InvestorsUnion Budget 2024Real Estate NewsAug 06, 2024
Prior to the Union Budget 2024, real estate investments would qualify for LTCG tax, provided they were held for more than 2 years, or 24 months. The LTCG tax payable would be 20%, along with indexation benefit. However, the government had proposed removing indexation benefits for all asset classes, including real estate, gold, and more.
To ease the blow, the finance minister had lowered the LTCG from 20% to 12.5%. However, this move was met with concerns from the real estate sector, which feared a surge in black money inflows in the segment.
The government has now proposed an amendment that allows investors to choose between the old and new LTCG regimes. They can pay tax on a lower rate of 12.5% (minus indexation) or pay LTCG at the rate of 20%, along with indexation benefit.
The grandfathering clause, which was earlier set at 2001, will now be considered at July 23rd, 2024. This means that for any property (land or building) that was transferred or sold before July 23rd, 2024, taxpayers will have the option to choose between either of the LTCG regimes, and pay the lower of the two as tax.
However, any property that has been sold after July 23rd, 2024 will continue to be taxable exclusively under the new LTCG regime i.e. taxable at 12.5% minus the benefit of indexation.
This benefit will only be applicable to real estate i.e. immovable property. Transfer/sale of other assets such as gold will continue to attract 12.5% LTCG sans indexation benefits.
The move is expected to bring relief to real estate investors who had been holding legacy, long-time investments in the sector. It will also help to ease the computation of capital gains for taxpayers and the tax administration.
In a recent example, an individual purchased a property in FY 2002-03 for Rs 30,00,000. In June 2024 (FY24-25), she decided to sell it for Rs 80,00,000. Under the new LTCG regime, her tax liability would come down to Rs 6,25,000 (12.5% of 50,00,000). However, if she opted for indexation benefits, her indexed cost of acquisition would be calculated using the formula Cost Inflation Index (CII) value for transfer/sale year/CII for purchase year, or 2001-02 (whichever is later) X cost of acquisition.
This is the cost she would have to pay, if she were to buy the same property today. But since she sold her house for Rs 80,00,000, she incurred a capital loss of around Rs 20,00,000 and hence, would not have to pay any LTCG tax.
It is essential for real estate investors to understand the implications of this move and seek professional advice to ensure they are making the most of this benefit.
The National Real Estate Development Council (NAREDCO) and other industry bodies have welcomed this move, stating that it will help to revive the real estate sector.
In the end, this move is expected to bring relief to real estate investors and help to ease the burden of LTCG tax liability. However, it is crucial for investors to be aware of the implications and seek professional advice to ensure they are making the most of this benefit.
Frequently Asked Questions
What is the new LTCG regime for real estate investments?
The new LTCG regime for real estate investments is 12.5% minus the benefit of indexation.
Can I choose between the old and new LTCG regimes for my real estate investments?
Yes, you can choose between the old and new LTCG regimes for your real estate investments. You can pay tax on a lower rate of 12.5% (minus indexation) or pay LTCG at the rate of 20%, along with indexation benefit.
What is the grandfathering clause for real estate investments?
The grandfathering clause for real estate investments is now considered at July 23rd, 2024. This means that for any property (land or building) that was transferred or sold before July 23rd, 2024, taxpayers will have the option to choose between either of the LTCG regimes, and pay the lower of the two as tax.
Will this benefit be applicable to other assets such as gold?
No, this benefit will only be applicable to real estate i.e. immovable property. Transfer/sale of other assets such as gold will continue to attract 12.5% LTCG sans indexation benefits.
How will this move affect real estate investors?
This move is expected to bring relief to real estate investors who had been holding legacy, long-time investments in the sector. It will also help to ease the computation of capital gains for taxpayers and the tax administration.
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