The Finance Minister has proposed some amendments to the income tax laws which will have far-reaching implications for real estate transactions. Let us discuss the same.
While removing the indexation benefits the government has compensated the taxpayers by reducing the applicable tax rate on long-term capital gains from 20% to 12.50% on all categories of investments except investment of debt category.
The Finance Minister has proposed some amendments to the income tax laws which will have far-reaching implications for real estate transactions. Let us discuss the same.
Your investment in real estate becomes long-term after you have held the same for more than 24 months. For computing long-term capital gains on the sale of any immovable property held for more than 24 months, you are allowed to enhance your cost of acquisition of the property by applying the cost inflation index (CII) till now. This effectively reduces the taxable long-term capital gains. Let us understand this with an example. If you had bought a plot of land in January 2015 for Rs. 1 Crore and sold the same for Rs. 2 Crores in January 2024, though your actual capital gains are Rs. 1 Crore your taxable long-term capital gains would be lower due to application of CII. The CII for the year of purchase is 240 whereas the CII for the year of sale is 348. So your indexed cost would be computed by multiplying the cost by the CII of the year of sale and dividing by the CII of the year of purchase i.e. 10,00,000*348/240=1,45,00,000 and the taxable long-term capital gains would be Rs. 55,00,000/-.
This amendment comes into effect immediately from the date of the announcement of the budget and will impact even those cases where the deal has been finalized but the agreement is not executed.
Please note that in case the property is acquired by you before 1st April 2001, you are allowed to adopt the fair market value of the property as of 1st April 2001. This benefit to adopt fair market value as of 1st April 2001 will continue to be available for all the properties acquired before this date. For arriving at fair market value you can either adopt the rate adopted for stamp duty purposes or obtain a valuation report from a registered valuer. The valuation as per the valuer’s report can not be higher than the one adopted for stamp duty purposes.
While removing the indexation benefits the government has compensated the taxpayers by reducing the applicable tax rate on long-term capital gains from 20% to 12.50% on all categories of investments except investment of debt category. The combined impact of the removal of indexation benefits and reduction in the tax rate would vary depending on how long you have held the asset. In the above example, the tax payable would be Rs. 12.50 lakhs (12.50% on one Crore rupees) without indexation and Rs. 11.50 lakhs @ 20% on Rs. 55 lakhs (indexed profits).
All those who wish to sell their existing residential house and buy a new residential house to avail of the exemption available under Section 54 of the Income Tax Act will have to invest a higher amount as the taxable long-term capital gains would be higher in the absence of benefit of indexation. In the example given above you will have to invest one crore rupees to avail the exemption instead of Rs. 55 lakhs had the indexation benefit continued. Please note that in case you wish to sell any long-term capital asset other than a residential house and wish to claim an exemption under Section 54F by investing in a residential house, removal of the indexation benefit will not impact you as you are anyway required to invest the net sale consideration on sale of the asset sold irrespective of the amount of taxable capital gains.
In case you do not invest the full sale consideration for Section 54F and capital gains for Section 54, your tax liability may get impacted due to the combined impact of the removal of indexation benefit and lowering of tax rates on long-term capital gains.
A buyer of an immovable property is required to deduct tax at 1% on the purchase price if the sale consideration exceeds Rs. 50 lakhs. In case there is more than one buyer or seller there was some confusion as to whether the threshold limit of Rs. 50 lakhs are to be considered concerning the share of each joint buyer/seller or concerning the aggregate value of the property. The same stand was clarified with the amendment of Section 194IA and each of the buyer has to deduct the tax @ 1% if the aggregate amount to be paid for the property exceeds the threshold of fifty lakh rupees.
Presently each individual or Hindi Undivided Family has to deduct tax @ 5% of any amount payable as rent in case the amount of rent for a month or part of the month exceeds Rs. 50,000/-. The provision is applicable in respect of any amount payable for the use of any land or building. Deduction of tax is required to be made during the last month of the year or the last month of the tenancy. To provide relief, the finance minister has proposed a reduced rate of 2% instead of 5% presently applicable.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on his twitter handle.
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