Introduction
The government’s announcement of numerous tax restructuring initiatives has focused a great deal of attention on the real estate industry in the Budget 2024, focusing on affordable housing in particular. To streamline the tax code, lessen compliance requirements, and broaden the tax base; Finance Minister, Nirmala Sitharaman has proposed major tax reforms. These changes are anticipated to affect real estate transactions and growth in the current fiscal year both directly and indirectly.
There are various amendments made in the real state sector, including firstly, the Pradhan Mantri Awas Yojana (PMAY-U) Urban 2.0 within which Rs 4,000 crore allocation has been made for the credit-linked subsidy plan, which would make loans more available to low- and middle-income earners as well as members of economically disadvantaged groups. Secondly, it has been advised to the state government by the finance minister, to slash stamp tax on all purchases, including those made by women. If this proposed plan is put into action, property purchasers who now pay greater stamp duty which is typically between 6 and 7% and even more in some states; will be much relieved. Additionally, it will entice female borrowers to purchase real estate under their names. Thirdly, the ‘Indication Benefit’ which was provided earlier in the transactions related to property, which includes the sale, re-sale or purchase of property will be eliminated for the calculation of Income Tax Return (ITR), which will be effective from 23rd July, 2024 and to be applied on the properties purchased after the year 2001.
This article will discuss the changes particularly related to the removal of the ‘Indexation Benefit’ which was earlier provided to the transactions in the real state sector and the slashing down of the Long-Term Capital Gain Tax (LTCG) from 20% to 12.50%. Furthermore, it will explore the concept of ‘Roll Over Benefits’ and how a taxpayer can avail of these benefits to attenuate the tax burden under these recent amendments.
What is this ‘Indexation Benefit’?
The practice of indexation, provided under Section 48 of The Income Tax Act, 1961, (the Act) involves adjusting an asset’s price of purchase, such as real estate, to reflect inflation over time. The profit earned from selling that particular asset is then computed using this modified price as capital gains. Indexation helps the owner ascertain the property’s value more precisely by accounting for inflation.
Every year, the government releases the Cost Inflation Index (CII), which calculates the increase in prices over the base year of 2001–2002. When selling an asset, you multiply the original buy price by the CII of the sale year and divide the result by the CII of the purchase year to get the inflation-adjusted purchase price. This is the purchase price that has been adjusted for inflation. A valuer starts by evaluating the value of an older property as of April 1, 2001, to determine its current value. The Reserve Bank of India’s yearly updated index is then used to alter this base value for inflation. The “fair market value” of the property for any year after 2000 is provided by this adjustment.
Illustration 1.0, (Note, let the CII for 2002 be 10 and the CII for 2023 be 12.) Now, an individual has purchased a real state property for Rs. 1 crore in the year 2002 and he sells the same property for Rs. 1.5 Crore in the year 2023. When we apply the formula for calculating purchase price by ‘Indexation Benefit’ it will be Rs. 1.2 crore [(1,00,00,000*12)/10]; which means multiplying the purchase price of the property by the CII of the sale year and then dividing the result with the CII of the purchase year. So, the capital gain in this Illustration 1.0 after implementing the ‘Indexation Benefit’ will amount to Rs. 0.3 crore (30 lakhs).
In the recent changes, proposed by the finance minister in the budget, the advantage of lowering the taxable profit of the real estate transaction, by an individual using this indexation benefit has been eliminated. In, the above ‘Illustration 1.0’ an individual’s taxable profit for the year 2024 after 23rd July, will be Rs. 0.5 crore (50 lakhs). Previously, when Indexation Benefits were allowed the tax rate on LTCG was 20% but after eliminating this benefit the government has reduced the tax rate to 12.50%. Therefore, the tax from Illustration 1.0 amounts to Rs. 6 Lakhs [(30*20/)100] before the amendment and Rs. 6,25,000 [(50*12.50)/100] after the recent amendment. This amendment aimed to simplify the computation process of tax, related to capital gains for taxpayers as well as for tax administrators.
Boon or a Bane: The recent ‘Removal’ and ‘Reduction’
The recent amendment has ‘removed’ the Indexation Benefits and ‘reduced’ the LTCG tax, the pertinent question here is to answer, how do these changes impact the real state sector? and whether this will be a blessing or a curse for the tax-payers? But, before dealing with this part we have to discuss, what exactly these LTCG and LTCG Tax are and how are they different from STCG and STCG Tax.
‘Capital assets’, include land, house property, building, machinery, patents and many more, a long-term capital asset has been owned for longer than ‘three years. If they are retained for more than 36 months. Therefore, the item would be classified as a long-term capital asset if it were sold after being purchased for a period of 36 months. Nonetheless, the relevant holding periods for certain of the assets are 12 and 24 months as well. If the owner owns a capital asset for more than 24 months, such as land, a building, or housing property, it is deemed a long-term capital asset, this was effective from the Financial Year (FY) 2017–18. Whereas, a short-term capital asset is kept for less than three years that is 36 months. Nonetheless, the holding periods of 24 and 12 months are imposed on certain of the assets. For unlisted shares (those that are not listed on an Indian stock exchange that is recognised) and immovable properties (land, buildings, and houses) from FY 2017–18, the period is 24 months. Lastly, “Capital gains income” is any profit or gain derived from the sale of a “capital asset.” If it is derived from long-term capital, it will be called LTCG and if derived from short-term capital it will be called Short Term Capital Gain (STCG) and the tax paid on these will be called LTCG-Tax and STCG-Tax; respectively.
Now, coming back to the first part of the question, two conditions are forming out of these amendments, firstly, shorter holding periods (less than ten years) and modest property price increase (less than 10% annually) result in a larger LTCG tax burden under the current scheme and secondly, investors who hang onto their property for more than ten years and witness significant annual price growth exceeding 10%, the LTCG tax under the new framework would be either neutral or somewhat advantageous. However, the new rule would likely put the taxpayer in a negative situation if the property’s price grows at an annual pace of less than 9%, which happens in most circumstances.
Rollover Benefits: In Mitigating Tax Burden
Sanjay Malhotra, the revenue secretary, has made it clear that under the new framework, rollover benefits will still apply to capital gains up to Rs 10 crore. This justification was made in response to criticism of the Budget’s new capital gains tax system structure. The STCG and LTCG tax rates have been modified. Sections 54, 54EC and 54F of the Act, discuss the Rollover benefits provided to an individual; as a tax-deferred mechanism; these sections are not only limited to the real state sector but are extended up to other assets as well. If a person or Hindu Undivided Family (HUF) sells a residential property and reinvests the earnings in another residential property, they are free from capital gains tax under Section 54 of the Act.
According to this section, the asset sold needs to be a long-term capital asset; specifically, a residential home, with revenue charged as income from the home to be eligible. Sellers who meet the eligibility requirements must build a house within three years of the selling date, or buy a residential property either one year before the sale or two years following the sale. In addition to lowering individual tax loads, this measure seeks to ease property transfers and encourage homeownership. Certain properties are exempted from obtaining the benefit under Section 54 these include, vacant plots and properties either commercial or non-commercial used for business are not eligible. Although Sections 54 and 54F both provide capital gains tax exemptions, they apply to distinct asset classes. While latter applies to any long-term capital asset sold, excluding residential properties, and the former expressly relates to the sale of residential properties and their reinvestment in another residential property.
Illustration 2.0 (Note- values from Illustration 1.0 have been used) Let, an individual sell the property for Rs. 1.5 crores; which was purchased for 1 Crore (from Illustration 1.0). Now, if the individual fulfils all conditions under Section 54 of the Income Tax Act and reinvests Rs. 1.5 crore (the complete sale value) fulfilling all the conditions; then the taxpayer is eligible for an exception for this tax. To claim this, ‘rollover benefit’ the taxpayer has to fill an additional form, Form 10BA with the other required documents which include; the sale deed of the old property, purchase deed of the new property, construction certificate or bank statements while filing the ITR.
Conclusion
Recent amendments in the 2024 Budget will impact a significant part of the transactions related to the real state sector. Though the government has abolished the ‘Indexation Benefit’ structure to smoothen the process of tax calculation this will have an adverse effect on some property transactions; which was discussed in this article. The reduction provided by the government in LTCG Tax will not be able to counterbalance the benefits provided earlier by the indexation framework. Now, the taxpayers after the implementation of these amendments should seek advice from their Chartered Accountants (C.A.) before doing any transaction related to property purchased after 2001. This will provide them with a more comprehensive and lucid understanding of their transaction, which will save their tax.
Furthermore, the continuing provision of Rollover Benefits will help the individual to invest smartly in the real state sector. It would be interesting to see how the comprehensive and nuanced nature of the Budget could bridge the wounds of the “under the weather” real estate sector in the upcoming future.
Author Bio
