The Union Authorities revised capital features tax charges by way of bulletins in Funds 2024. Lengthy-term capital features 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.
Nonetheless, the most important supply of discontent got here for the true property investments, the place the elimination of the indexation profit immediately 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 features 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 features. If these tax adjustments are bothering you, you possibly can search reduction underneath one in all Sections 54, 54EC, and 54F.
keep away from taxes on Lengthy Time period Capital features?
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 features bonds (solely if in case you have offered a property, together with home)
These sections provide reduction from taxes solely on the long-term capital features. No reduction from taxes on short-term capital features.
Be aware: I’ve used “Residential home”, “residential home”, or simply “home” interchangeably on this submit. Residential Home/Residential Property/Home is such a property from the place the earnings as “Earnings from Home Property”.
There’s one other approach 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 seek advice from this submit. I’ll NOT focus on tax-loss harvesting on this submit.
I current a abstract about tax reduction from capital features 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 inbuilt 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 may 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 might be prolonged to solely Rs 10 crores. On the remaining Rs 2 crores of LTCG, you have to pay tax on capital features.
Level to Be aware
- Solely LTCG: To save lots of taxes, you want to make investments solely the Lengthy-term capital features. Part 54 presents no reduction for short-term capital features.
- Don’t promote the NEW home too quickly: In the event you promote the NEW home (purchased to set off capital features) inside 3 years of buy (completion of building), the acquisition price of the NEW Home shall be thought of NIL for dedication of capital features. This can be a approach to claw again the tax-benefit for those who 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 features 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 yr (not later than tax-filing due date), whichever is earlier, then you have to deposit these unutilized features in Capital features account. Subsequently, you possibly can withdraw the quantity for buy/building of home inside timelines specified. I’ll clarify this later on this submit with the assistance of an illustration.
- Claw again of Tax Profit: If you don’t make the most of the quantity deposited in capital features account in the direction of buy/building of home inside timelines, the tax profit underneath Part 54 might 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 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 a minimum of 75 lacs inside specified timelines.
Case 1
In the event you purchase/assemble a home value 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 Earnings tax return for FY2025 (not later than the due date, which is often July 31). Be aware there’s one other restriction. The unutilized features have to be invested inside 1 yr of sale of the OLD asset. Therefore, the deadline for depositing cash within the capital features 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 features 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/building of home. You have to deposit the remaining Rs 65 lacs within the Capital features 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).
- In the event 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 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 your entire quantity inside specified timelines: No tax legal responsibility on LTCG
- In the event 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). Keep 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 (apart from residential property)
You may 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 inbuilt 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. In the event you breach this rule, then the tax profit taken underneath Part 54 F might 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. In the event you breach this rule, then the tax profit taken underneath Part 54 F might 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 features. You have 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 offered these shares for Rs 1.25 crores (web consideration). LTCG of Rs 75 lacs.
If you wish to keep away from paying tax on your entire Rs 75 lacs, you have to make investments your entire Rs 1.25 crores into shopping for a NEW home, topic to assembly different circumstances.
If purchase a less expensive home, then the exempt capital features might 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/Web 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 value Rs 13 crores.
Nonetheless, Part 54F caps the tax profit on web consideration of Rs 10 crores.
Whereas you’ll nonetheless get the tax profit, the profit might 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/Web Consideration)
= Rs 9 crores * (10 crores/15 crores) = Rs 6 crores.
Be aware how Rs 13 crores has been changed by 10 crores within the numerator.
On this case, solely Rs 6 crores might be exempt from tax. The remaining LTCG of Rs 3 crores might be topic to taxes.
Level to Be aware
- You have 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 features. Right here, you have to make investments the gross sales proceed to get profit.
- Web consideration = Whole sale consideration obtained – Value incurred within the sale of the asset
- Don’t promote the NEW home too quickly: In the event you promote the NEW home (purchased to set off capital features) inside 3 years of buy (or completion of building), the tax profit might be clawed again. Beneath Part 54, the price of the New Asset was thought of NIL in such instances. Nonetheless, in Part 54F, there is no such thing as a such provision. The capital features quantity on which you prevented paying tax by shopping for the NEW home might be taxed as capital features.
- Part 54F does NOT provide you with possibility to take a position gross sales proceeds in 2 residential homes
- Capital features account: This is similar as for Part 54. Is not going to repeat right here. Unutilized sale proceeds (and never simply the capital features) have to be invested within the Capital features 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 features account inside specified timelines (2 years for buy and three years for building), the tax profit might be clawed again.
#3 Part 54EC (Bought property, Purchased capital features bonds)
OLD/SOLD asset: Property (doesn’t essentially should be a residential property)
NEW Asset (to be purchased): Capital features bonds
What are Capital Positive factors Bonds?
NHAI and REC are permitted to concern capital features bonds. These bonds have maturity of 5 years.
The present charge of curiosity is 5.25% each year. The curiosity earnings is taxable.
Pre-conditions and Timelines
- You have to make investments the long-term features within the capital features bond inside 6 months from the date of sale of OLD asset/property.
- You can not promote these capital features bonds till maturity (5 years). In the event you promote earlier than maturity, the tax profit might be clawed again.
- You can not monetize these bonds in any method. Even for those who take mortgage towards these bonds, the tax profit taken might 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 features 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 best).
You make investments Rs 50 lacs in capital features bonds. Even for those who make investments extra, the tax reduction might 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 multiple Part?
As I see, there is no such thing as a restriction on claiming reduction underneath greater than 1 part.
Nonetheless, as we’ve seen above, the OLD asset (offered) have to be eligible for reduction underneath two sections.
Part 54: OLD asset have to be a residential property
Part 54F: OLD asset might be any asset anticipate 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 possibly can declare reduction underneath each Part 54 and Part 54EC.
Different, if in case you have offered a industrial property, you possibly can declare reduction underneath each Part 54F and 54 EC.
Do take into account the price of saving taxes
If you purchase a home, you have to additionally pay stamp obligation. Stamp obligation is a state topic and can range throughout states. That is an extra price to you. Shopping for a home could contain different prices corresponding to brokerage too. Allow us to say this whole further price is 7% of the price of the New home.
Now, if you’re shopping for a home simply to avoid wasting taxes (and never since you need to keep there or since you see the home as a superb funding), you may need to rethink your resolution contemplating these prices.
Chances are you’ll not need to purchase a home value Rs 1 crore (earlier than stamp obligation and prices) simply to avoid wasting tax on LTCG value Rs 5 lacs.
The capital features bonds (Part 54EC) haven’t any further price of funding, however you have to take into account 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 recognize the chance price. Nonetheless, if you’re not a particularly aggressive investor and are prepared to contemplate these bonds as a part of your fastened earnings portfolio, the capital features bonds appear a superb choice to me after contemplating the taxes saved on LTCG.
LTCG on sale of home is Rs 30 lacs. In the event you make investments Rs 30 lacs in capital features 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 selection.
Disclaimer: Earnings Tax guidelines are difficult and are purported to be difficult to cowl all situations and supply exemptions. Whereas I’ve written this submit to the perfect of my understanding, I’m not a tax professional. 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 submit.
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 rigorously earlier than investing.
This submit is for schooling objective alone and is NOT funding recommendation. This isn’t a suggestion 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 features that you simply take into account necessary. Your monetary targets could also be totally different. You could have a special threat profile. Chances are you’ll 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 is no such thing as a one-size-fits-all answer in investments. What could also be a superb funding for sure buyers could NOT be good for others. And vice versa. Due to this fact, learn and perceive the product phrases and circumstances and take into account your threat profile, necessities, and suitability earlier than investing in any funding product or following an funding method.