The Union Authorities revised capital beneficial properties tax charges by means of bulletins in Budget 2024. Lengthy-term capital beneficial properties on the sale of any capital asset shall be taxed at 12.5% with out indexation.
As with all change, sure classes of investments (overseas fairness/ gold MFs) benefited whereas the others (shares and mutual funds) misplaced marginally.
Nonetheless, the largest supply of discontent got here for the actual property investments, the place the removing of the indexation profit all of the sudden elevated the notional tax legal responsibility for a lot of traders, who owned non-performing actual property property. 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 may search aid and keep away from paying taxes on long-term capital beneficial properties. If these tax adjustments are bothering you, you may search aid underneath certainly one of Sections 54, 54EC, and 54F.
How you can keep away from taxes on Lengthy Time period Capital beneficial properties?
There are 3 methods.
- Part 54: Purchase a residential property (solely you’ve got offered a home)
- Part 54F: Purchase a residential property (if in case you have offered any capital asset besides home)
- Part 54EC: Purchase capital beneficial properties bonds (solely if in case you have offered a property, together with home)
These sections supply aid from taxes solely on the long-term capital beneficial properties. No aid from taxes on short-term capital beneficial properties.
Word: 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’s one other strategy to keep away from paying taxes. That’s by reserving losses someplace in your portfolio. This course of is known as tax-loss harvesting. For extra on this matter, please discuss with this post. I’ll NOT talk about tax-loss harvesting on this put up.
I current a abstract about tax aid 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 have to be bought or in-built India.
- You MUST PURCHASE a residential home inside a interval of 1 yr 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 possibly can set off LTCG as much as Rs 10 crores underneath Part 54.
You e-book LTCG of Rs 12 crores on sale of home.
And you purchase a NEW home value Rs 12 crores.
Nonetheless, the tax profit will probably be prolonged to solely Rs 10 crores. On the remaining Rs 2 crores of LTCG, you have to pay tax on capital beneficial properties.
Level to Word
- Solely LTCG: To avoid wasting taxes, it’s essential make investments solely the Lengthy-term capital beneficial properties. Part 54 provides no aid 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 value of the NEW Home shall be thought of NIL for dedication of capital beneficial properties. This can be a strategy to claw again the tax-benefit when 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. Nonetheless, 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 yr (not later than tax-filing due date), whichever is earlier, then you have to deposit these unutilized beneficial properties in Capital gains account. Subsequently, you may 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 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 acquire a home for Rs 50 lacs in 2019. You offered the home in 2024 (after July 23, 2024) for Rs 1.25 crores. Say you offered on August 5, 2024.
Lengthy-Time period Capital Acquire = Rs 1.25 crores – Rs 50 lacs = Rs 75 lacs (assuming 12.5% with no indexation profit is best)
To keep away from paying tax on this achieve, you have to purchase (or assemble) a home value no less than 75 lacs inside specified timelines.
Case 1
When you purchase/assemble a home value Rs 40 lacs, you then 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 normally July 31). Word there may be one other restriction. The unutilized beneficial properties have to be invested inside 1 yr 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 yr from the date of sale of OLD home/asset (August 5, 2024 + 1 yr = 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 have to 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’ve got used Rs 10 lacs already for buy/development of home. You have to deposit the remaining Rs 65 lacs within the Capital beneficial properties account.
- If you don’t deposit something in CG account, you have to 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 might be telling the Authorities that the price of new property is not going to be greater than 60 lacs (50+10). Therefore, you have to deposit tax on LTCG value Rs 15 lacs (Rs 75 lacs – Rs 60 lacs) whereas submitting ITR for FY2025.
- You deposit Rs 50 lacs and make the most of the complete 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 have to 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 possibly can take profit underneath Part 54F on sale of any capital asset (shares, mutual funds, gold and so on.)
NEW Asset: Residential property
Pre-conditions and Timelines
- The home have to be bought or in-built India.
- You MUST PURCHASE a residential home (NEW asset) inside a interval of 1 yr 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 have to not personal greater than 1 residential home (excluding the NEW home).
- You have to not buy one other residential property (home), other than the NEW home, inside 1 yr 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.
- You have 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 web consideration. Therefore, you can’t get away by reinvesting simply the capital beneficial properties. You have to make investments the sale proceeds to get profit underneath this part.
Part 54F units the cap for internet consideration at Rs 10 crores.
Case 1
You acquire shares for Rs 50 lacs. You offered these shares for Rs 1.25 crores (internet consideration). LTCG of Rs 75 lacs.
If you wish to keep away from paying tax on the complete Rs 75 lacs, you have to make investments the complete 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 aid underneath Part 54F = LTCG * (Price 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 acquire shares for Rs 6 crores. Bought for Rs 15 crores. LTCG of Rs 9 crores.
You acquire a NEW home value Rs 13 crores.
Nonetheless, Part 54F caps the tax profit on internet 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 aid underneath Part 54F = LTCG * (Price of New home/Internet Consideration)
= Rs 9 crores * (10 crores/15 crores) = Rs 6 crores.
Word 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 Word
- You have to make investments the sale consideration (and never simply LTCG): That is in sharp distinction to Part 54, the place you may search aid by simply investing the capital beneficial properties. Right here, you have to make investments the gross sales proceed to get profit.
- Internet consideration = Whole sale consideration obtained – Price 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. Below Part 54, the price of the New Asset was thought of NIL in such instances. Nonetheless, in Part 54F, there isn’t a such provision. The capital beneficial properties quantity on which you averted paying tax by shopping for the NEW home will probably be taxed as capital beneficial properties.
- Part 54F does NOT provide you with possibility to take a position gross sales proceeds in 2 residential homes
- Capital beneficial properties account: This is identical as for Part 54. Is not going to repeat right here. Unutilized sale proceeds (and never simply the capital beneficial properties) have to be invested within the Capital beneficial properties account inside 12 months or earlier than submitting your taxes for the monetary yr (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 should be a residential property)
NEW Asset (to be purchased): Capital beneficial properties bonds
What are Capital Features Bonds?
NHAI and REC are permitted to challenge capital beneficial properties bonds. These bonds have maturity of 5 years.
The present price of curiosity is 5.25% each year. The curiosity revenue is taxable.
Pre-conditions and Timelines
- You have 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 when you take mortgage towards these bonds, the tax profit taken will probably be clawed again.
Any cap on LTCG set-off
You possibly can set off LTCG solely as much as Rs 50 lacs by investing in capital beneficial properties bonds underneath Part 54EC.
Illustration
Price 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 best).
You make investments Rs 50 lacs in capital beneficial properties bonds. Even when you make investments extra, the tax aid 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 aid underneath multiple Part?
As I see, there isn’t a restriction on claiming aid underneath greater than 1 part.
Nonetheless, as we’ve got seen above, the OLD asset (offered) have to be eligible for aid underneath two sections.
Part 54: OLD asset have to be a residential property
Part 54F: OLD asset might 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 offered a residential home, you may declare aid underneath each Part 54 and Part 54EC.
Various, if in case you have offered a business property, you may declare aid underneath each Part 54F and 54 EC.
Do contemplate the price of saving taxes
Whenever you purchase a home, you have to additionally pay stamp responsibility. Stamp responsibility is a state topic and can fluctuate throughout states. That is an extra value to you. Shopping for a home might contain different prices equivalent to brokerage too. Allow us to say this complete further value 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 wish to keep there or since you see the home as funding), you would possibly wish to rethink your determination contemplating these prices.
Chances are you’ll not wish to purchase a home value Rs 1 crore (earlier than stamp responsibility and prices) simply to avoid wasting tax on LTCG value Rs 5 lacs.
The capital beneficial properties bonds (Part 54EC) haven’t any further value of funding, however you have to contemplate the low and taxable rate of interest provided on these bonds. Therefore, whilst you save tax on LTCG by investing in these bonds, you have to respect the chance value. Nonetheless, in case you are not a particularly aggressive investor and are prepared to contemplate these bonds as a part of your fastened revenue portfolio, the capital beneficial properties bonds appear 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 might be invested as per your alternative.
Disclaimer: Revenue Tax guidelines are sophisticated and are speculated to be sophisticated to cowl all eventualities and supply exemptions. Whereas I’ve written this put up to the very best of my understanding, I’m not a tax professional. My information 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 by no means assure efficiency of the middleman or present any assurance of returns to traders. Funding in securities market is topic to market dangers. Learn all of the associated paperwork rigorously earlier than investing.
This put up is for schooling 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 should not recommendatory. My views could also be biased, and I could select to not deal with features that you simply contemplate vital. Your monetary objectives could also be completely different. You’ll have a special danger profile. Chances are you’ll be in a special life stage than I’m in. Therefore, you have to NOT base your funding selections based mostly on my writings. There isn’t a one-size-fits-all resolution in investments. What could also be funding for sure traders might NOT be good for others. And vice versa. Due to this fact, learn and perceive the product phrases and situations and contemplate your danger profile, necessities, and suitability earlier than investing in any funding product or following an funding method.
