Budget 2024: How will long-term capital tax change your real-estate investments post-budget?

• LTCG of up to Rs 1,20,000 in a single financial year is tax-free.
• Effective July 23rd, 2024, indexation benefits will no longer be available for real estate, gold
• Effective July 23rd, LTCG will be charges at 12.5%, sans indexation benefit

After FM Nirmala Sitharaman proposed to remove indexation benefits on long-term capital gains (LTCG) on real estate, gold, and other unlisted assets, discussions were abuzz on the internet as to how this would lead to significantly higher taxation on gains from property sales. Previously, LTCG on long-term capital gains was marked at 20%, but it came with indexation benefits, which eventually lowered the individual's overall tax liability. Now, it has been lowered to 12.5%, but minus any indexation benefit.

So, with indexation gone, how will gains from property sales be taxed going ahead? Is this applicable to all properties? What is set to change? Does it help that the LTCG tax has been brought down from 20% to 12.5%? Lets take a deep-dive

First, explain this long term short-term conundrum to me
So, how much capital gains tax you're supposed to pay depends on how long you hold a particular asset before selling it. Prior to yesterday's announcement, there were 3 holding periods which determined whether an asset was held for long-term or short-term:

The situation before-

• Shares, units of mutual funds would qualify for LTCG tax, if they are held for more than 12 months. If the holding period is less than 1 year, you'd have to pay short-term capital gains (STCG).
• Real estate and immovable property would qualify for LTCG tax, if held for more than 24 months (2 years), along with indexation benefit.
  
  
• Bonds, debentures and gold were to be considered long-term capital assets, if they were held for more than 36 months (3 years), with indexation benefit.

But going ahead, there will only be two waiting periods which will determine whether an asset would be classified as long-term or short-term

The situation now-

• For all listed securities (stocks, mutual fund units), the holding period for LTCG tax purposes would be more than 1 year (sans indexation benefits)
  
  All other assets (real estate, gold, bond, debentures) will qualify for LTCG tax, if they are held for more than 24 months (minus indexation benefits).

What was the taxation situation earlier on long-term capital gains? What has changed?
So, lets say Tara purchased a property in FY 2004-05 for Rs 20,00,000. In FY 2024-25, she decided to sell it for Rs 60,00,000. You'd think she'll have to pay a flat 20% on Rs 40,00,000, which was her total profit earned from selling her property (Rs 60,00,000-20,00,000). But this is where indexation swooped in and helped cushion the overall tax liability.

Prior to July 23rd, 2024, the government considered something known as "indexed cost of acquisition" for determining an individuals' total LTCG tax liability, which was calculated using the following formula:

[Cost Inflation Index (CII)value for transfer/sale year/CII for purchase year, or 2001-02 (whichever is later) X cost of acquisition].

Thankfully, you don't have to go about calculating this CII value, since the government does this for you, and notifies the same officially. What CII essentially does is that it compares the current prices of basket A(which contains a bunch of products and services) to the price of the same basket A in the year of comparison, to reflect the change in prices caused by inflation.

So, for Tara, her indexed cost of acquisition would come down to Rs 64,24,778 [363(CII for 2024-25) /113(CII for 2004-05)X 20,00,000]. This would mean she incurred a capital loss of Rs 4,24,778, since her indexed cost of acquisition is more than her sales receipts. So, she does not need to pay any LTCG tax. She can set off this loss, but only against her other long term gains with a limit of Rs 2 lakh in one financial year, and can carry forward the same for a maximum of 8 years.

However, this changed when the budget memorandum noted yesterday, "indexation available under the second proviso to section 48 is proposed to be removed for calculation of any long-term capital gains which is presently available for property, gold, and other unlisted assets. This will ease the computation of capital gains for the taxpayer and the tax administration".

This means that indexation benefits on LTCG will be applicable starting July 23rd, 2024. To understand its impact, assume that this rule is in effect from April 1, 2024. In that case, Tara's LTCG will be a flat 12.5% of her total gains of Rs 38,75,000 (remember, Rs 1,25,000 per year on LTCG are tax-exempt). This would bring Tara's taxability to Rs 4,84,375

Long story, short, minus the indexation benefit, Tara will have to pay Rs 4,84,375 as long-term capital gains tax.

However, there has been a slight increase in the basic tax exemption limit for LTCG. Previously, LTCG of up to Rs 1,00,000 in a single financial year was tax-free. But now, this threshold has been raised to Rs 1,25,000. Small wins!


Okay, is there something that continues to be the same for long-term capital gains?
Yes, roll-over benefits continue without change. This means you can re-invest the proceeds from sale of your old property into buying a new, residential one, in order to avoid capital gains tax. But that too, is not without its share of catches:

You can reinvest these funds in either 54EC bonds, which have a maximum annual investment limit of Rs 50,00,000. Or, you can avail this exemption for a maximum of 2 residential houses, provided your capital gains are limited to Rs 2 crore.

Also, if you've it purchased a property, or held from before 2001, you can continue to avail indexation benefits, thanks to something called a grandfathering clause.

Does indexation or lower tax rates work better?
There's no general rule here. But a cursory look indicates that high capital gains would be favorably taxed under these reduced tax rates, while lower returns and holding periods would find indexation to be a better option.

Says Pankaj Kumar, VP – Fundamental Research, Kotak Securities, "the Union Budget-FY25 has rationalized long-term capital gains tax on real estate transaction. It proposed to remove indexation benefits and reduce the long term capital gains tax rate from 20% to 12.5% with immediate effect (grandfathering for properties held before 2001). We find that the new capital gains tax structure for real estate favours investors, who have generated high IRRs, while investors with poor IRRs would be worse off in the new regime".

"On the other hand, it is expected to have limited impact on end users who purchase homes for personal consumption. The budget has also talked about encouraging states to lower the stamp duty and consider lower duties for women buyers. Lowering of stamp duties would reduce the overall acquisition cost in high stamp duty states/markets like Gurgaon, Chennai, Mumbai and Kolkata", continued Kumar.