The Union Authorities revised capital good points tax charges by means of bulletins in Price range 2024. Lengthy-term capital good points on the sale of any capital asset shall be taxed at 12.5% with out indexation.
As with all 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 actual property investments, the place the elimination of the indexation profit abruptly elevated the notional tax legal responsibility for a lot of buyers, 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 good points 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 numerous IT sections, the place you may search aid and keep away from paying taxes on long-term capital good points. If these tax adjustments are bothering you, you may search aid beneath certainly one of Sections 54, 54EC, and 54F.
Learn how to keep away from taxes on Lengthy Time period Capital good points?
There are 3 methods.
- Part 54: Purchase a residential property (solely you may have offered a home)
- Part 54F: Purchase a residential property (you probably have offered any capital asset besides home)
- Part 54EC: Purchase capital good points bonds (solely you probably have offered a property, together with home)
These sections supply aid from taxes solely on the long-term capital good points. No aid from taxes on short-term capital good points.
Word: I’ve used “Residential home”, “residential home”, or simply “home” interchangeably on this publish. Residential Home/Residential Property/Home is such a property from the place the revenue as “Earnings from Home Property”.
There’s one other solution 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 subject, please check with this publish. I’ll NOT talk about tax-loss harvesting on this publish.
I current a abstract about tax aid from capital good points taxes within the following desk.
#1 Part 54 (Offered 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 beneath 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 likely be prolonged to solely Rs 10 crores. On the remaining Rs 2 crores of LTCG, you have to pay tax on capital good points.
Level to Word
- Solely LTCG: To avoid wasting taxes, it’s worthwhile to make investments solely the Lengthy-term capital good points. Part 54 provides no aid for short-term capital good points.
- Don’t promote the NEW home too quickly: If you happen to promote the NEW home (purchased to set off capital good points) inside 3 years of buy (completion of building), the acquisition value of the NEW Home shall be thought-about NIL for willpower of capital good points. It is a solution to claw again the tax-benefit should 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 beneath Part 54. Nevertheless, this selection of shopping for 2 homes (and but taking profit beneath Part 54) can be exercised solely as soon as in your lifetime.
- Capital good points account: In case you are 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 have to deposit these unutilized good points in Capital good points account. Subsequently, you may withdraw the quantity for buy/building of home inside timelines specified. I’ll clarify this later on this publish with the assistance of an illustration.
- Claw again of Tax Profit: If you don’t make the most of the quantity deposited in capital good points account in direction of buy/building of home inside timelines, the tax profit beneath Part 54 will likely 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 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 Achieve = 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 acquire, you have to purchase (or assemble) a home price no less than 75 lacs inside specified timelines.
Case 1
If you happen to 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’t buy/assemble a home earlier than submitting your Earnings tax return for FY2025 (not later than the due date, which is normally July 31). Word there may be one other restriction. The unutilized good points should be invested inside 1 12 months of sale of the OLD asset. Therefore, the deadline for depositing cash within the capital good points 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 have to deposit the unutilized quantity from this Rs 75 lacs within the capital good points account earlier than submitting your ITR for FY2025 (not later than July 31, 2025).
Allow us to say you may have used Rs 10 lacs already for buy/building of home. You could deposit the remaining Rs 65 lacs within the Capital good points 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).
- If you happen to deposit solely Rs 50 lacs, then you’re 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 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
- If you happen to 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 (Offered any capital asset, Purchased a home)
OLD/SOLD Asset: Any capital asset (apart from residential property)
You may take profit beneath 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 have to not personal greater than 1 residential home (excluding the NEW home).
- You could not buy one other residential property (home), other than the NEW home, inside 1 12 months from the date of sale of OLD asset. If you happen to breach this rule, then the tax profit taken beneath Part 54 F will likely be clawed again.
- You could not assemble one other residential property (home), other than the NEW home, inside 3 years from the date of sale of OLD asset. If you happen to breach this rule, then the tax profit taken beneath Part 54 F will likely be clawed again.
Any cap on LTCG set-off
The profit beneath Part 54F is linked to funding of the web consideration. Therefore, you can’t get away by reinvesting simply the capital good points. You could make investments the sale proceeds to get profit beneath this part.
Part 54F units the cap for internet consideration at Rs 10 crores.
Case 1
You purchased 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 all the Rs 75 lacs, you have to 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 good points will likely be lowered proportionately.
Allow us to say the price of the NEW home is Rs 90 lacs.
Quantity of aid beneath 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. Offered 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 internet consideration of Rs 10 crores.
Whereas you’ll nonetheless get the tax profit, the profit will likely be calculated as if the price of the NEW home was Rs 10 crores.
Quantity of aid beneath Part 54F = LTCG * (Value 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 likely be exempt from tax. The remaining LTCG of Rs 3 crores will likely be topic to taxes.
Level to Word
- You could 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 good points. Right here, you have to 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: If you happen to promote the NEW home (purchased to set off capital good points) inside 3 years of buy (or completion of building), the tax profit will likely be clawed again. Below Part 54, the price of the New Asset was thought-about NIL in such circumstances. Nevertheless, in Part 54F, there isn’t any such provision. The capital good points quantity on which you averted paying tax by shopping for the NEW home will likely be taxed as capital good points.
- Part 54F does NOT offer you possibility to speculate gross sales proceeds in 2 residential homes
- Capital good points account: This is similar as for Part 54. Won’t repeat right here. Unutilized sale proceeds (and never simply the capital good points) should be invested within the Capital good points 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 good points account inside specified timelines (2 years for buy and three years for building), the tax profit will likely be clawed again.
#3 Part 54EC (Offered property, Purchased capital good points bonds)
OLD/SOLD asset: Property (doesn’t essentially need to be a residential property)
NEW Asset (to be purchased): Capital good points bonds
What are Capital Good points Bonds?
NHAI and REC are permitted to problem capital good points bonds. These bonds have maturity of 5 years.
The present charge of curiosity is 5.25% every year. The curiosity revenue is taxable.
Pre-conditions and Timelines
- You could make investments the long-term good points within the capital good points bond inside 6 months from the date of sale of OLD asset/property.
- You can’t promote these capital good points bonds till maturity (5 years). If you happen to promote earlier than maturity, the tax profit will likely be clawed again.
- You can’t monetize these bonds in any method. Even should you take mortgage in opposition to these bonds, the tax profit taken will likely 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 good points bonds beneath Part 54EC.
Illustration
Value of property: Rs 40 lacs. Purchased in 2019.
Offered 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 good points bonds. Even should you make investments extra, the tax aid will likely be capped at 50 lacs.
Exempt LTCG = 50 lacs
Taxable LTCG = Rs 80 lacs – Rs 50 lacs = Rs 30 lacs
Can I search aid beneath multiple Part?
As I see, there isn’t any restriction on claiming aid beneath greater than 1 part.
Nevertheless, as now we have seen above, the OLD asset (offered) should be eligible for aid beneath two sections.
Part 54: OLD asset should be a residential property
Part 54F: OLD asset may be any asset anticipate residential home
Part 54EC: OLD asset be any property, however not essentially a residential property.
So, you probably have offered a residential home, you may declare aid beneath each Part 54 and Part 54EC.
Different, you probably have offered a business property, you may declare aid beneath each Part 54F and 54 EC.
Do contemplate the price of saving taxes
Once you purchase a home, you have to additionally pay stamp responsibility. Stamp responsibility is a state topic and can fluctuate throughout states. That is a further value to you. Shopping for a home might contain different prices akin to brokerage too. Allow us to say this whole further value is 7% of the price of the New home.
Now, if you’re shopping for a home simply to save lots of taxes (and never since you need to keep there or since you see the home as a great funding), you would possibly need to rethink your resolution contemplating these prices.
You might not need to purchase a home price Rs 1 crore (earlier than stamp responsibility and prices) simply to save lots of tax on LTCG price Rs 5 lacs.
The capital good points bonds (Part 54EC) don’t have any further value of funding, however you have to contemplate the low and taxable rate of interest supplied on these bonds. Therefore, whilst you save tax on LTCG by investing in these bonds, you have to admire the chance value. Nevertheless, if you’re not an especially aggressive investor and are prepared to contemplate these bonds as a part of your mounted revenue portfolio, the capital good points bonds appear a great choice to me after contemplating the taxes saved on LTCG.
LTCG on sale of home is Rs 30 lacs. If you happen to make investments Rs 30 lacs in capital good points bonds, you earn 5.25% p.a. on these bonds. The curiosity is taxable.
If you don’t put money into these bonds, you pay 12.5% tax. Rs 3.75 lacs. The remaining Rs 26.25 lacs may be invested as per your selection.
Disclaimer: Earnings Tax guidelines are difficult and are presupposed to be difficult to cowl all eventualities and supply exemptions. Whereas I’ve written this publish to the very best of my understanding, I’m not a tax knowledgeable. My data could also be incomplete. You’re suggested to seek the advice of a Chartered Account earlier than taking any motion primarily based on the contents on this publish.
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 buyers. Funding in securities market is topic to market dangers. Learn all of the associated paperwork fastidiously earlier than investing.
This publish is for schooling goal alone and is NOT funding recommendation. This isn’t a advice to speculate or NOT put money into any product. The securities, devices, or indices quoted are for illustration solely and usually are not recommendatory. My views could also be biased, and I’ll select to not give attention to facets that you simply contemplate vital. Your monetary targets could also be totally different. You’ll have a special threat profile. You might be in a special life stage than I’m in. Therefore, you have to NOT base your funding selections primarily based on my writings. There isn’t any one-size-fits-all resolution in investments. What could also be a great 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.
