The Capital gains maze

Real estate has always been a much sought-after investment and post-Covid, property prices have skyrocketed across the country. Since property is regarded as a capital asset for income tax purposes, the gains accrued by the sale of assets are taxed under the capital gains tax regime. Similarly, capital gains or losses may arise from the sale of different types of capital assets such as stocks, mutual funds, bonds and other investments and are taxed accordingly. This could be short-term or long-term, based on the time period for which the asset was held before being sold. Various changes have been introduced in the Union budget concerning capital gains.

Time period: For classifying assets into short-term and long-term, there are now only two holding periods — 12 months and 24 months. The 36-month holding period has been removed. The holding period for all listed securities is 12 months. This does not apply to debt funds and unlisted bonds. All listed securities with a holding period exceeding 12 months are considered long-term. The holding period for all other assets is 24 months.

Investors get an option

• According to tax consultants, the decision to offer taxpayers a choice to pay 20 per cent LTCG tax with indexation benefits or 12.5 per cent without indexation is a welcome step as investors get an option.

  “We have seen that in some cases, the investors benefit while opting to pay 20 per cent LTCG tax with indexation benefit, while in some cases their tax liability is reduced when they opt for 12.5 per cent without indexation. It differs from case to case,” says tax consultant Vikas Sharma.

• To take an example, consider that the cost of acquisition of property in 1990 was Rs 5 lakh and the fair market value was Rs 10 lakh as on April 1, 2001. Suppose the property was sold on July 23, 2024, for Rs 1 crore, then the LTCG will be Rs 63.7 lakh, considering indexed cost of Rs 36.3 lakh for 2024-25. Finally, the taxable amount will be Rs 12.74 lakh (taxed at 20 per cent).
• The LTCG will be Rs 90 lakh without indexation and the taxable amount will be Rs 11.25 lakh (taxed at the rate of 12.5 per cent). Thus, an individual has to pay a lesser amount. However, the same is not true for all properties. In many cases, opting for indexation benefits results in lesser tax.

Short-term capital gains: The taxation of short-term capital gains (STCG) for listed equity shares, equity-oriented funds and business trusts has been increased to 20 per cent from 15 per cent. The STCG on other non-financial assets will be taxed at applicable slab rates. Unlisted bonds, debentures, debt mutual funds and market-linked debentures, regardless of the holding period, will be taxed at the applicable rates.

Long-term capital gains (LTCG): The sale of financial assets such as equities attracts 12.5 per cent tax compared to 10 per cent earlier when they are sold after holding for longer than a year. Even non-financial assets face the same rate of capital gains tax and it is also applicable to all asset classes.

Exemption limit: The limit on the exemption of long-term capital gains on the transfer of equity shares or equity-oriented units or units of a business trust has been increased from Rs 1 lakh to Rs 1.25 lakh per year.

Tax on other assets: The tax on other assets has been reduced from 20 per cent to 12.5 per cent with effect from July 23, 2024. On the other hand, the indexation benefit that previously was available on the sale of long-term assets has been eliminated. However, the government has given taxpayers an option to compute taxes on real estate transactions purchased before July 23, 2024, either at 12.5 per cent without indexation or at 20 per cent with indexation.

Impact on real estate

According to realtors, the decision to offer taxpayers a choice to pay 20 per cent LTCG tax with indexation benefits or 12.5 per cent sans indexation on the sale of property acquired before July 23, 2024, is a commendable move.

Real estate experts are of the view that indexation brings tax advantages for property investors, as it permits adjustments to the purchase price keeping inflation in mind, and reducing capital gains tax burdens upon property sale. This provision increases the appeal of real estate investments. It bolsters investor trust and positions real estate as an avenue for long-term wealth growth.

The housing demand also rises due to favourable interest rates and taxation.

Additionally, the rollover benefits remain intact, which means that if capital gains are invested, with deductions under Sections 54, 54F and 54EC, for buying or constructing residential real estate up to specified limits, the LTCG would continue to be exempt from tax.

According to experts, the changes give homeowners flexibility in their tax liabilities when they sell their property. For properties held over a long period, where inflation has majorly raised the property’s value, opting for the 20 per cent tax rate with indexation would be beneficial.

Indexation adjusts the purchase price for inflation, potentially reducing the taxable gain and overall tax liability. For properties held for shorter periods or in low-inflation periods, the 12.5 per cent rate sans indexation could be more beneficial and result in a lower tax burden.

For homebuyers, this revision can potentially stimulate the residential property market because it provides clarity and implies potential tax burden reduction. The homebuyers’ sentiment, the expectation is, will improve as they have flexible options for addressing their future capital gains tax burden. This will result in higher demand, particularly in markets where property prices have risen significantly.

These changes can also potentially lead to some investors selling properties sooner to benefit from the new tax regime.

As per Anarock Research, H1 2024 saw total sales of nearly 2.51 lakh units across the top seven cities, 9 per cent more than the same period last year (H1 2023). Given that Q2 2024 saw sales tapering due to the election heat and the increased prices across cities, the new tax imposed by the government in the budget was considered a deal-breaker for many. Now, with the government giving these options to homebuyers, the housing sales momentum is expected to continue unimpeded.

Reducing tax liability

The limit on the exemption of long-term capital gains on the transfer of equity shares or equity-oriented units or units of business trust has been increased from Rs 1 lakh to Rs 1.25 lakh per year. Investors can plan their exit from the investments by spreading the redemption over two financial years in order to avail the tax exemption limit for both years.

“There are a few other options available to investors to save LTCG such as Section 54EC, and under Sections 54 and 54F. Section 54 is available on long-term capital gains on the sale of a house property and exemption under Section 54F is available on long-term capital gains on sale of any asset other than a house property,” says Mandar Shendye, managing partner, wealthcom.

Section 54EC: As per provisions under Section 54EC of the Income Tax Act, 1961, any long-term capital gains arising from the transfer of a capital asset would be exempted from tax if the entire capital gains realised are invested within six months of the date of transfer in eligible Section 54EC bonds.

Such investment is held for five years and the bonds so acquired cannot be transferred or converted into money, nor can any loan or advance be taken on the security of such bonds within five years from the date of acquisition, else the capital gains exemption benefit would be withdrawn

Section 54: It provides exemption on long-term capital gains from the sale of residential property if the proceeds from such sale are reinvested in purchasing or constructing another residential property within a specified time frame.

The Section 54F exemption is allowed only on long-term capital gains.