The Union Authorities revised capital beneficial properties tax charges by bulletins in Price range 2024. Lengthy-term capital beneficial properties on the sale of any capital asset shall be taxed at 12.5% with out indexation.
As with every change, sure classes of investments (international fairness/ gold MFs) benefited whereas the others (shares and mutual funds) misplaced marginally.
Nevertheless, the most important supply of discontent got here for the true property investments, the place the elimination of the indexation profit all of the sudden elevated the notional tax legal responsibility for a lot of buyers, who owned non-performing actual property belongings. The indexation profit has been restored for actual property properties purchased earlier than July 23, 2024. For properties purchased earlier than July 23, 2024, the vendor would have a option to pay beneficial properties at 20% after indexation or 12.5% with out indexation. No indexation profit for property purchased on or after July 23, 2024.
Whereas the Authorities has tinkered with holding intervals and tax charges, it has not made any adjustments to varied IT sections, the place you possibly can search reduction and keep away from paying taxes on long-term capital beneficial properties. If these tax adjustments are bothering you, you possibly can search reduction underneath certainly one of Sections 54, 54EC, and 54F.
Tips on how to keep away from taxes on Lengthy Time period Capital beneficial properties?
There are 3 methods.
- Part 54: Purchase a residential property (solely you could have bought a home)
- Part 54F: Purchase a residential property (if in case you have bought any capital asset besides home)
- Part 54EC: Purchase capital beneficial properties bonds (solely if in case you have bought a property, together with home)
These sections provide reduction from taxes solely on the long-term capital beneficial properties. No reduction from taxes on short-term capital beneficial properties.
Observe: I’ve used “Residential home”, “residential home”, or simply “home” interchangeably on this put up. Residential Home/Residential Property/Home is such a property from the place the revenue as “Revenue from Home Property”.
There may be one other solution to keep away from paying taxes. That’s by reserving losses someplace in your portfolio. This course of is named tax-loss harvesting. For extra on this subject, please consult with this put up. I’ll NOT focus on tax-loss harvesting on this put up.
I current a abstract about tax reduction from capital beneficial properties taxes within the following desk.
#1 Part 54 (Bought a home, Purchased a home)
OLD/SOLD asset: Residential property/home
NEW Asset (to be purchased): Residential property/home
Pre-conditions and Timelines
- The home should be bought or inbuilt India.
- You MUST PURCHASE a residential home inside a interval of 1 12 months earlier than or 2 years after the sale of such home (OLD asset); OR
- You MUST CONSTRUCT a residential home inside a interval of three years from the date of sale of such home (Outdated asset).
Any cap on LTCG set-off
You may set off LTCG as much as Rs 10 crores underneath Part 54.
You guide LTCG of Rs 12 crores on sale of home.
And you purchase a NEW home price Rs 12 crores.
Nevertheless, the tax profit will probably be prolonged to solely Rs 10 crores. On the remaining Rs 2 crores of LTCG, you should pay tax on capital beneficial properties.
Level to Observe
- Solely LTCG: To avoid wasting taxes, it’s good to make investments solely the Lengthy-term capital beneficial properties. Part 54 provides no reduction for short-term capital beneficial properties.
- Don’t promote the NEW home too quickly: When you promote the NEW home (purchased to set off capital beneficial properties) inside 3 years of buy (completion of development), the acquisition price of the NEW Home shall be thought of NIL for willpower of capital beneficial properties. It is a solution to claw again the tax-benefit in case you promote the brand new home too quickly.
- In case the LTCG on sale of OLD home is as much as Rs 2 crores, you should purchase as much as 2 properties and nonetheless take profit underneath Part 54. Nevertheless, this feature of shopping for 2 homes (and but taking profit underneath Part 54) can be exercised solely as soon as in your lifetime.
- Capital beneficial properties account: If you’re unable to buy (assemble) the NEW home inside 12 months from sale of OLD home OR earlier than submitting returns for the monetary 12 months (not later than tax-filing due date), whichever is earlier, then you should deposit these unutilized beneficial properties in Capital beneficial properties account. Subsequently, you possibly can withdraw the quantity for buy/development of home inside timelines specified. I’ll clarify this later on this put up with the assistance of an illustration.
- Claw again of Tax Profit: If you don’t make the most of the quantity deposited in capital beneficial properties account in the direction of buy/development of home inside timelines, the tax profit underneath Part 54 will probably be clawed again on the unutilized quantity. You’ll have to pay LTCG tax on the unutilized quantity.
Illustration
You purchased a home for Rs 50 lacs in 2019. You bought the home in 2024 (after July 23, 2024) for Rs 1.25 crores. Say you bought on August 5, 2024.
Lengthy-Time period Capital Achieve = Rs 1.25 crores – Rs 50 lacs = Rs 75 lacs (assuming 12.5% with no indexation profit is healthier)
To keep away from paying tax on this achieve, you should purchase (or assemble) a home price no less than 75 lacs inside specified timelines.
Case 1
When you purchase/assemble a home price Rs 40 lacs, then you definitely keep away from paying tax solely on Rs 40 lacs.
You’ll have to pay LTCG tax on the remaining Rs 35 lacs (Rs 75 lacs – Rs 40 lacs).
Case 2
You can not buy/assemble a home earlier than submitting your Revenue tax return for FY2025 (not later than the due date, which is often July 31). Observe there’s one other restriction. The unutilized beneficial properties should be invested inside 1 12 months of sale of the OLD asset. Therefore, the deadline for depositing cash within the capital beneficial properties account is the earliest of the next dates.
- 1 12 months from the date of sale of OLD home/asset (August 5, 2024 + 1 12 months = August 5, 2025)
- Precise Date of ITR submitting for FY2025
- Due date for ITR submitting for FY2025 (say July 31, 2025)
Assuming you file your ITR return on the final day (July 31, 2025), you should deposit the unutilized quantity from this Rs 75 lacs within the capital beneficial properties account earlier than submitting your ITR for FY2025 (not later than July 31, 2025).
Allow us to say you could have used Rs 10 lacs already for buy/development of home. It’s essential to deposit the remaining Rs 65 lacs within the Capital beneficial properties account.
- If you don’t deposit something in CG account, you should pay tax on the remaining Rs 65 lacs LTCG whereas submitting ITR for FY2025 (or as advance tax).
- When you deposit solely Rs 50 lacs, then you’re telling the Authorities that the price of new property won’t be greater than 60 lacs (50+10). Therefore, you should deposit tax on LTCG price Rs 15 lacs (Rs 75 lacs – Rs 60 lacs) whereas submitting ITR for FY2025.
- You deposit Rs 50 lacs and make the most of all the quantity inside specified timelines: No tax legal responsibility on LTCG
- When you deposit Rs 50 lacs however make the most of solely Rs 30 lacs inside specified timelines: Then you should pay tax on the unutilized LTCG of Rs 20 lacs (50 lacs – 30 lacs). Bear in mind, that is over and above tax on LTCG on Rs 15 lacs paid earlier.
#2 Part 54F (Bought any capital asset, Purchased a home)
OLD/SOLD Asset: Any capital asset (aside from residential property)
You may take profit underneath Part 54F on sale of any capital asset (shares, mutual funds, gold and so forth.)
NEW Asset: Residential property
Pre-conditions and Timelines
- The home should be bought or inbuilt India.
- You MUST PURCHASE a residential home (NEW asset) inside a interval of 1 12 months earlier than or 2 years after the sale of such OLD asset; OR
- You MUST CONSTRUCT a residential home (NEW asset) inside a interval of three years from the date of sale of such OLD asset.
- On the date of sale of the OLD asset, you should not personal greater than 1 residential home (excluding the NEW home).
- It’s essential to not buy one other residential property (home), other than the NEW home, inside 1 12 months from the date of sale of OLD asset. When you breach this rule, then the tax profit taken underneath Part 54 F will probably be clawed again.
- It’s essential to not assemble one other residential property (home), other than the NEW home, inside 3 years from the date of sale of OLD asset. When you breach this rule, then the tax profit taken underneath Part 54 F will probably be clawed again.
Any cap on LTCG set-off
The profit underneath Part 54F is linked to funding of the online consideration. Therefore, you can’t get away by reinvesting simply the capital beneficial properties. It’s essential to make investments the sale proceeds to get profit underneath this part.
Part 54F units the cap for web consideration at Rs 10 crores.
Case 1
You purchased shares for Rs 50 lacs. You bought these shares for Rs 1.25 crores (web consideration). LTCG of Rs 75 lacs.
If you wish to keep away from paying tax on all the Rs 75 lacs, you should make investments all the Rs 1.25 crores into shopping for a NEW home, topic to assembly different situations.
If purchase a less expensive home, then the exempt capital beneficial properties will probably be lowered proportionately.
Allow us to say the price of the NEW home is Rs 90 lacs.
Quantity of reduction underneath Part 54F = LTCG * (Value of New home/Internet Consideration)
= Rs 75 lacs * (90 lacs/1.25 crores) = Rs 54 lacs
You’ll have to pay LTCG tax on Rs 21 lacs (Rs 75 lacs – Rs 54 lacs).
Case 2
You purchased shares for Rs 6 crores. Bought for Rs 15 crores. LTCG of Rs 9 crores.
You purchased a NEW home price Rs 13 crores.
Nevertheless, Part 54F caps the tax profit on web consideration of Rs 10 crores.
Whereas you’ll nonetheless get the tax profit, the profit will probably be calculated as if the price of the NEW home was Rs 10 crores.
Quantity of reduction underneath Part 54F = LTCG * (Value of New home/Internet Consideration)
= Rs 9 crores * (10 crores/15 crores) = Rs 6 crores.
Observe how Rs 13 crores has been changed by 10 crores within the numerator.
On this case, solely Rs 6 crores will probably be exempt from tax. The remaining LTCG of Rs 3 crores will probably be topic to taxes.
Level to Observe
- It’s essential to make investments the sale consideration (and never simply LTCG): That is in sharp distinction to Part 54, the place you possibly can search reduction by simply investing the capital beneficial properties. Right here, you should make investments the gross sales proceed to get profit.
- Internet consideration = Complete sale consideration acquired – Value incurred within the sale of the asset
- Don’t promote the NEW home too quickly: When you promote the NEW home (purchased to set off capital beneficial properties) inside 3 years of buy (or completion of development), the tax profit will probably be clawed again. Beneath Part 54, the price of the New Asset was thought of NIL in such circumstances. Nevertheless, in Part 54F, there isn’t any such provision. The capital beneficial properties quantity on which you prevented paying tax by shopping for the NEW home will probably be taxed as capital beneficial properties.
- Part 54F does NOT provide you with choice to take a position gross sales proceeds in 2 residential homes
- Capital beneficial properties account: This is similar as for Part 54. Won’t repeat right here. Unutilized sale proceeds (and never simply the capital beneficial properties) should be invested within the Capital beneficial properties account inside 12 months or earlier than submitting your taxes for the monetary 12 months (not later than the due date), whichever is earlier.
- If you don’t make the most of the quantities invested in capital beneficial properties account inside specified timelines (2 years for buy and three years for development), the tax profit will probably be clawed again.
#3 Part 54EC (Bought property, Purchased capital beneficial properties bonds)
OLD/SOLD asset: Property (doesn’t essentially need to be a residential property)
NEW Asset (to be purchased): Capital beneficial properties bonds
What are Capital Beneficial properties Bonds?
NHAI and REC are permitted to difficulty capital beneficial properties bonds. These bonds have maturity of 5 years.
The present charge of curiosity is 5.25% each year. The curiosity revenue is taxable.
Pre-conditions and Timelines
- It’s essential to make investments the long-term beneficial properties within the capital beneficial properties bond inside 6 months from the date of sale of OLD asset/property.
- You can not promote these capital beneficial properties bonds till maturity (5 years). When you promote earlier than maturity, the tax profit will probably be clawed again.
- You can not monetize these bonds in any method. Even in case you take mortgage in opposition to these bonds, the tax profit taken will probably be clawed again.
Any cap on LTCG set-off
You may set off LTCG solely as much as Rs 50 lacs by investing in capital beneficial properties bonds underneath Part 54EC.
Illustration
Value of property: Rs 40 lacs. Purchased in 2019.
Bought for Rs 1.2 crores (on August 5, 2024)
LTCG = Rs 1.2 crores – Rs 40 lacs = Rs 80 lacs (assuming 12.5% with out indexation is healthier).
You make investments Rs 50 lacs in capital beneficial properties bonds. Even in case you make investments extra, the tax reduction will probably be capped at 50 lacs.
Exempt LTCG = 50 lacs
Taxable LTCG = Rs 80 lacs – Rs 50 lacs = Rs 30 lacs
Can I search reduction underneath a couple of Part?
As I see, there isn’t any restriction on claiming reduction underneath greater than 1 part.
Nevertheless, as we now have seen above, the OLD asset (bought) should be eligible for reduction underneath two sections.
Part 54: OLD asset should be a residential property
Part 54F: OLD asset may be any asset count on residential home
Part 54EC: OLD asset be any property, however not essentially a residential property.
So, if in case you have bought a residential home, you possibly can declare reduction underneath each Part 54 and Part 54EC.
Different, if in case you have bought a business property, you possibly can declare reduction underneath each Part 54F and 54 EC.
Do contemplate the price of saving taxes
If you purchase a home, you should additionally pay stamp responsibility. Stamp responsibility is a state topic and can fluctuate throughout states. That is a further price to you. Shopping for a home might contain different prices comparable to brokerage too. Allow us to say this whole extra price is 7% of the price of the New home.
Now, in case you are shopping for a home simply to avoid wasting taxes (and never since you need to keep there or since you see the home as an excellent funding), you may need to rethink your resolution contemplating these prices.
It’s possible you’ll not need to purchase a home price Rs 1 crore (earlier than stamp responsibility and prices) simply to avoid wasting tax on LTCG price Rs 5 lacs.
The capital beneficial properties bonds (Part 54EC) don’t have any extra price of funding, however you should contemplate the low and taxable rate of interest supplied on these bonds. Therefore, when you save tax on LTCG by investing in these bonds, you should admire the chance price. Nevertheless, in case you are not a particularly aggressive investor and are keen to contemplate these bonds as a part of your fastened revenue portfolio, the capital beneficial properties bonds appear an excellent choice to me after contemplating the taxes saved on LTCG.
LTCG on sale of home is Rs 30 lacs. When you make investments Rs 30 lacs in capital beneficial properties bonds, you earn 5.25% p.a. on these bonds. The curiosity is taxable.
If you don’t spend money on these bonds, you pay 12.5% tax. Rs 3.75 lacs. The remaining Rs 26.25 lacs may be invested as per your alternative.
Disclaimer: Revenue Tax guidelines are sophisticated and are presupposed to be sophisticated to cowl all situations and supply exemptions. Whereas I’ve written this put up to the perfect of my understanding, I’m not a tax knowledgeable. My data could also be incomplete. You might be suggested to seek the advice of a Chartered Account earlier than taking any motion based mostly on the contents on this put up.
Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM under no circumstances assure efficiency of the middleman or present any assurance of returns to buyers. Funding in securities market is topic to market dangers. Learn all of the associated paperwork fastidiously earlier than investing.
This put up is for training function alone and is NOT funding recommendation. This isn’t a advice to take a position or NOT spend money on any product. The securities, devices, or indices quoted are for illustration solely and will not be recommendatory. My views could also be biased, and I could select to not deal with elements that you just contemplate essential. Your monetary targets could also be completely different. You might have a special threat profile. It’s possible you’ll be in a special life stage than I’m in. Therefore, you should NOT base your funding choices based mostly on my writings. There isn’t a one-size-fits-all answer in investments. What could also be an excellent funding for sure buyers might NOT be good for others. And vice versa. Due to this fact, learn and perceive the product phrases and situations and contemplate your threat profile, necessities, and suitability earlier than investing in any funding product or following an funding strategy.