The Union Authorities revised capital positive aspects tax charges by bulletins in Funds 2024. Lengthy-term capital positive aspects 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 actual property investments, the place the elimination of the indexation profit instantly elevated the notional tax legal responsibility for a lot of traders, 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 positive aspects 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 durations and tax charges, it has not made any modifications to varied IT sections, the place you possibly can search aid and keep away from paying taxes on long-term capital positive aspects. If these tax modifications are bothering you, you possibly can search aid beneath one among Sections 54, 54EC, and 54F.
How you can keep away from taxes on Lengthy Time period Capital positive aspects?
There are 3 methods.
- Part 54: Purchase a residential property (solely you will have offered a home)
- Part 54F: Purchase a residential property (in case you have offered any capital asset besides home)
- Part 54EC: Purchase capital positive aspects bonds (solely in case you have offered a property, together with home)
These sections provide aid from taxes solely on the long-term capital positive aspects. No aid from taxes on short-term capital positive aspects.
Word: 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 revenue as “Revenue 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 known as tax-loss harvesting. For extra on this subject, please confer with this submit. I’ll NOT focus on tax-loss harvesting on this submit.
I current a abstract about tax aid from capital positive aspects 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 in-built 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 (Previous asset).
Any cap on LTCG set-off
You’ll be able to 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.
Nonetheless, the tax profit will probably be prolonged to solely Rs 10 crores. On the remaining Rs 2 crores of LTCG, you could pay tax on capital positive aspects.
Level to Word
- Solely LTCG: To save lots of taxes, it is advisable make investments solely the Lengthy-term capital positive aspects. Part 54 presents no aid for short-term capital positive aspects.
- Don’t promote the NEW home too quickly: When you promote the NEW home (purchased to set off capital positive aspects) inside 3 years of buy (completion of building), the acquisition value of the NEW Home shall be thought of NIL for willpower of capital positive aspects. This can be 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. Nonetheless, 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 positive aspects account: If you’re 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 could deposit these unutilized positive aspects in Capital positive aspects 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 positive aspects account in the direction of buy/building of home inside timelines, the tax profit beneath Part 54 will probably 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 acquire, you could purchase (or assemble) a home price no less than 75 lacs inside specified timelines.
Case 1
When you 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 Revenue tax return for FY2025 (not later than the due date, which is normally July 31). Word there may be one other restriction. The unutilized positive aspects have to be invested inside 1 yr of sale of the OLD asset. Therefore, the deadline for depositing cash within the capital positive aspects 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 could deposit the unutilized quantity from this Rs 75 lacs within the capital positive aspects account earlier than submitting your ITR for FY2025 (not later than July 31, 2025).
Allow us to say you will have used Rs 10 lacs already for buy/building of home. You could deposit the remaining Rs 65 lacs within the Capital positive aspects account.
- If you don’t deposit something in CG account, you could pay tax on the remaining Rs 65 lacs LTCG whereas submitting ITR for FY2025 (or as advance tax).
- When you deposit solely Rs 50 lacs, then you might be telling the Authorities that the price of new property is not going to be greater than 60 lacs (50+10). Therefore, you could 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 the whole quantity inside specified timelines: No tax legal responsibility on LTCG
- When you deposit Rs 50 lacs however make the most of solely Rs 30 lacs inside specified timelines: Then you could 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’ll be able to take profit beneath 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 in-built 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 could not personal greater than 1 residential home (excluding the NEW home).
- You could not buy one other residential property (home), aside from the NEW home, inside 1 yr from the date of sale of OLD asset. When you breach this rule, then the tax profit taken beneath Part 54 F will probably be clawed again.
- You could not assemble one other residential property (home), aside from the NEW home, inside 3 years from the date of sale of OLD asset. When you breach this rule, then the tax profit taken beneath Part 54 F will probably 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 positive aspects. 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 the whole Rs 75 lacs, you could make investments the whole 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 positive aspects will probably be diminished 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. Bought for Rs 15 crores. LTCG of Rs 9 crores.
You purchased a NEW home price Rs 13 crores.
Nonetheless, Part 54F caps the tax profit on internet consideration of Rs 10 crores.
Whereas you’ll nonetheless get the tax profit, the profit will probably 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 probably be exempt from tax. The remaining LTCG of Rs 3 crores will probably 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 possibly can search aid by simply investing the capital positive aspects. Right here, you could make investments the gross sales proceed to get profit.
- Internet consideration = Whole sale consideration acquired – Value incurred within the sale of the asset
- Don’t promote the NEW home too quickly: When you promote the NEW home (purchased to set off capital positive aspects) inside 3 years of buy (or completion of building), the tax profit will probably be clawed again. Below Part 54, the price of the New Asset was thought of NIL in such circumstances. Nonetheless, in Part 54F, there is no such thing as a such provision. The capital positive aspects quantity on which you averted paying tax by shopping for the NEW home will probably be taxed as capital positive aspects.
- Part 54F does NOT offer you choice to take a position gross sales proceeds in 2 residential homes
- Capital positive aspects account: This is similar as for Part 54. Won’t repeat right here. Unutilized sale proceeds (and never simply the capital positive aspects) have to be invested within the Capital positive aspects 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 positive aspects account inside specified timelines (2 years for buy and three years for building), the tax profit will probably be clawed again.
#3 Part 54EC (Bought property, Purchased capital positive aspects bonds)
OLD/SOLD asset: Property (doesn’t essentially must be a residential property)
NEW Asset (to be purchased): Capital positive aspects bonds
What are Capital Positive aspects Bonds?
NHAI and REC are permitted to problem capital positive aspects bonds. These bonds have maturity of 5 years.
The present charge of curiosity is 5.25% each year. The curiosity revenue is taxable.
Pre-conditions and Timelines
- You could make investments the long-term positive aspects within the capital positive aspects bond inside 6 months from the date of sale of OLD asset/property.
- You can’t promote these capital positive aspects bonds till maturity (5 years). When you promote earlier than maturity, the tax profit will probably 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 probably be clawed again.
Any cap on LTCG set-off
You’ll be able to set off LTCG solely as much as Rs 50 lacs by investing in capital positive aspects bonds beneath 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 positive aspects bonds. Even should you make investments extra, the tax aid will probably 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 is no such thing as a restriction on claiming aid beneath greater than 1 part.
Nonetheless, as now we have seen above, the OLD asset (offered) have to be eligible for aid beneath two sections.
Part 54: OLD asset have to be a residential property
Part 54F: OLD asset will be any asset count on residential home
Part 54EC: OLD asset be any property, however not essentially a residential property.
So, in case you have offered a residential home, you possibly can declare aid beneath each Part 54 and Part 54EC.
Different, in case you have offered a business property, you possibly can declare aid beneath each Part 54F and 54 EC.
Do think about the price of saving taxes
Whenever you purchase a home, you could additionally pay stamp obligation. Stamp obligation is a state topic and can range throughout states. That is an extra value to you. Shopping for a home might contain different prices resembling brokerage too. Allow us to say this complete further value is 7% of the price of the New home.
Now, in case you are shopping for a home simply to avoid wasting taxes (and never since you need to keep there or since you see the home as an excellent 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 obligation and prices) simply to avoid wasting tax on LTCG price Rs 5 lacs.
The capital positive aspects bonds (Part 54EC) haven’t any further value of funding, however you could think about the low and taxable rate of interest supplied on these bonds. Therefore, whilst you save tax on LTCG by investing in these bonds, you could admire the chance value. Nonetheless, in case you are not a particularly aggressive investor and are prepared to think about these bonds as a part of your fastened revenue portfolio, the capital positive aspects bonds appear an excellent choice to me after contemplating the taxes saved on LTCG.
LTCG on sale of home is Rs 30 lacs. When you make investments Rs 30 lacs in capital positive aspects 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 will be invested as per your alternative.
Disclaimer: Revenue Tax guidelines are sophisticated and are imagined to be sophisticated to cowl all eventualities and supply exemptions. Whereas I’ve written this submit to one of the best 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 based mostly on the contents on this submit.
Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM on no account assure efficiency of the middleman or present any assurance of returns to traders. Funding in securities market is topic to market dangers. Learn all of the associated paperwork rigorously earlier than investing.
This submit is for training goal alone and is NOT funding recommendation. This isn’t a suggestion to take a position or NOT put money into any product. The securities, devices, or indices quoted are for illustration solely and aren’t recommendatory. My views could also be biased, and I could select to not concentrate on points that you just think about essential. Your monetary objectives could also be totally different. You might have a unique threat profile. You might be in a unique life stage than I’m in. Therefore, you could NOT base your funding selections based mostly on my writings. There is no such thing as a one-size-fits-all resolution in investments. What could also be an excellent funding for sure traders might NOT be good for others. And vice versa. Subsequently, learn and perceive the product phrases and circumstances and think about your threat profile, necessities, and suitability earlier than investing in any funding product or following an funding method.
