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 all change, sure classes of investments (overseas fairness/ gold MFs) benefited whereas the others (shares and mutual funds) misplaced marginally.
Nevertheless, the largest supply of discontent got here for the true property investments, the place the elimination of the indexation profit out of the blue 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 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 may search reduction and keep away from paying taxes on long-term capital features. If these tax adjustments are bothering you, you may search reduction beneath one in every of Sections 54, 54EC, and 54F.
Find out how to keep away from taxes on Lengthy Time period Capital features?
There are 3 methods.
- Part 54: Purchase a residential property (solely you have got bought a home)
- Part 54F: Purchase a residential property (in case you have bought any capital asset besides home)
- Part 54EC: Purchase capital features bonds (solely in case you have bought a property, together with home)
These sections supply reduction from taxes solely on the long-term capital features. No reduction from taxes on short-term capital features.
Observe: 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 known as tax-loss harvesting. For extra on this subject, please seek advice from this submit. I’ll NOT talk about tax-loss harvesting on this submit.
I current a abstract about tax reduction from capital features taxes within the following desk.
#1 Part 54 (Offered 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 12 months 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 possibly can set off LTCG as much as Rs 10 crores beneath Part 54.
You e-book LTCG of Rs 12 crores on sale of home.
And you purchase a NEW home price Rs 12 crores.
Nevertheless, the tax profit can be prolonged to solely Rs 10 crores. On the remaining Rs 2 crores of LTCG, you will need to pay tax on capital features.
Level to Observe
- Solely LTCG: To avoid wasting taxes, you might want to make investments solely the Lengthy-term capital features. Part 54 affords no reduction for short-term capital features.
- Don’t promote the NEW home too quickly: If you happen to promote the NEW home (purchased to set off capital features) inside 3 years of buy (completion of development), the acquisition price of the NEW Home shall be thought of NIL for willpower of capital features. This can be a approach to claw again the tax-benefit when 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 buy as much as 2 properties and nonetheless take profit beneath Part 54. Nevertheless, this feature of shopping for 2 homes (and but taking profit beneath Part 54) can be exercised solely as soon as in your lifetime.
- Capital features 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 12 months (not later than tax-filing due date), whichever is earlier, then you will need to deposit these unutilized features in Capital features account. Subsequently, you may withdraw the quantity for buy/development 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 direction of buy/development of home inside timelines, the tax profit beneath Part 54 can be clawed again on the unutilized quantity. You’ll have to pay LTCG tax on the unutilized quantity.
Illustration
To procure a home for Rs 50 lacs in 2019. You bought the home in 2024 (after July 23, 2024) for Rs 1.25 crores. Say you bought on August 5, 2024.
Lengthy-Time period Capital Achieve = Rs 1.25 crores – Rs 50 lacs = Rs 75 lacs (assuming 12.5% with no indexation profit is healthier)
To keep away from paying tax on this acquire, you will need to purchase (or assemble) a home price not less than 75 lacs inside specified timelines.
Case 1
If you happen to 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 Earnings tax return for FY2025 (not later than the due date, which is often July 31). Observe there’s one other restriction. The unutilized features have to be invested inside 1 12 months 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 12 months from the date of sale of OLD home/asset (August 5, 2024 + 1 12 months = 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 will need 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 have got used Rs 10 lacs already for buy/development of home. You could deposit the remaining Rs 65 lacs within the Capital features account.
- If you don’t deposit something in CG account, you will need to pay tax on the remaining Rs 65 lacs LTCG whereas submitting ITR for FY2025 (or as advance tax).
- If you happen to 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 will need to 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
- If you happen to deposit Rs 50 lacs however make the most of solely Rs 30 lacs inside specified timelines: Then you will need to pay tax on the unutilized LTCG of Rs 20 lacs (50 lacs – 30 lacs). Bear in mind, that is over and above tax on LTCG on Rs 15 lacs paid earlier.
#2 Part 54F (Offered any capital asset, Purchased a home)
OLD/SOLD Asset: Any capital asset (aside from residential property)
You possibly can take profit beneath Part 54F on sale of any capital asset (shares, mutual funds, gold and many others.)
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 12 months 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 will need to not personal greater than 1 residential home (excluding the NEW home).
- You could not buy one other residential property (home), other than the NEW home, inside 1 12 months from the date of sale of OLD asset. If you happen to breach this rule, then the tax profit taken beneath Part 54 F can be clawed again.
- You could not assemble one other residential property (home), other than the NEW home, inside 3 years from the date of sale of OLD asset. If you happen to breach this rule, then the tax profit taken beneath Part 54 F can be clawed again.
Any cap on LTCG set-off
The profit beneath Part 54F is linked to funding of the online consideration. Therefore, you can not get away by reinvesting simply the capital features. 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
To procure shares for Rs 50 lacs. You bought 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 will need to make investments the whole Rs 1.25 crores into shopping for a NEW home, topic to assembly different situations.
If purchase a less expensive home, then the exempt capital features can be diminished proportionately.
Allow us to say the price of the NEW home is Rs 90 lacs.
Quantity of reduction beneath Part 54F = LTCG * (Price 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
To procure shares for Rs 6 crores. Offered for Rs 15 crores. LTCG of Rs 9 crores.
To procure a NEW home price Rs 13 crores.
Nevertheless, Part 54F caps the tax profit on internet consideration of Rs 10 crores.
Whereas you’ll nonetheless get the tax profit, the profit can be calculated as if the price of the NEW home was Rs 10 crores.
Quantity of reduction beneath Part 54F = LTCG * (Price of New home/Internet Consideration)
= Rs 9 crores * (10 crores/15 crores) = Rs 6 crores.
Observe how Rs 13 crores has been changed by 10 crores within the numerator.
On this case, solely Rs 6 crores can be exempt from tax. The remaining LTCG of Rs 3 crores can be topic to taxes.
Level to Observe
- You could make investments the sale consideration (and never simply LTCG): That is in sharp distinction to Part 54, the place you may search reduction by simply investing the capital features. Right here, you will need to make investments the gross sales proceed to get profit.
- Internet consideration = Whole sale consideration acquired – Price incurred within the sale of the asset
- Don’t promote the NEW home too quickly: If you happen to promote the NEW home (purchased to set off capital features) inside 3 years of buy (or completion of development), the tax profit can be clawed again. Beneath Part 54, the price of the New Asset was thought of NIL in such circumstances. Nevertheless, in Part 54F, there isn’t a such provision. The capital features quantity on which you averted paying tax by shopping for the NEW home can be taxed as capital features.
- Part 54F does NOT offer you choice to speculate 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 12 months (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 development), the tax profit can be clawed again.
#3 Part 54EC (Offered 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 subject capital features bonds. These bonds have maturity of 5 years.
The present fee of curiosity is 5.25% each year. The curiosity earnings is taxable.
Pre-conditions and Timelines
- You could 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’t promote these capital features bonds till maturity (5 years). If you happen to promote earlier than maturity, the tax profit can be clawed again.
- You can’t monetize these bonds in any method. Even when you take mortgage towards these bonds, the tax profit taken can be clawed again.
Any cap on LTCG set-off
You possibly can set off LTCG solely as much as Rs 50 lacs by investing in capital features bonds beneath Part 54EC.
Illustration
Price of property: Rs 40 lacs. Purchased in 2019.
Offered 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 healthier).
You make investments Rs 50 lacs in capital features bonds. Even when you make investments extra, the tax reduction can be capped at 50 lacs.
Exempt LTCG = 50 lacs
Taxable LTCG = Rs 80 lacs – Rs 50 lacs = Rs 30 lacs
Can I search reduction beneath a couple of Part?
As I see, there isn’t a restriction on claiming reduction beneath greater than 1 part.
Nevertheless, as we have now seen above, the OLD asset (bought) have to be eligible for reduction beneath two sections.
Part 54: OLD asset have to be a residential property
Part 54F: OLD asset could be any asset anticipate residential home
Part 54EC: OLD asset be any property, however not essentially a residential property.
So, in case you have bought a residential home, you may declare reduction beneath each Part 54 and Part 54EC.
Various, in case you have bought a industrial property, you may declare reduction beneath each Part 54F and 54 EC.
Do think about the price of saving taxes
If you purchase a home, you will need to additionally pay stamp responsibility. Stamp responsibility is a state topic and can differ throughout states. That is an extra price to you. Shopping for a home might 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, in case you are shopping for a home simply to save lots of taxes (and never since you need to keep there or since you see the home as a very good funding), you would possibly need to rethink your resolution contemplating these prices.
You could not need to purchase a home price Rs 1 crore (earlier than stamp responsibility and prices) simply to save lots of tax on LTCG price Rs 5 lacs.
The capital features bonds (Part 54EC) don’t have any further price of funding, however you will need to 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 will need to respect the chance price. Nevertheless, in case you are not a particularly aggressive investor and are prepared to contemplate these bonds as a part of your mounted earnings portfolio, the capital features bonds appear a very good choice to me after contemplating the taxes saved on LTCG.
LTCG on sale of home is Rs 30 lacs. If you happen to 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 put money into these bonds, you pay 12.5% tax. Rs 3.75 lacs. The remaining Rs 26.25 lacs could be invested as per your selection.
Disclaimer: Earnings Tax guidelines are difficult and are speculated to be difficult to cowl all situations and supply exemptions. Whereas I’ve written this submit to the most effective of my understanding, I’m not a tax professional. My information could also be incomplete. You might be 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 under no circumstances 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 fastidiously earlier than investing.
This submit is for schooling goal alone and is NOT funding recommendation. This isn’t a suggestion to speculate or NOT put money into any product. The securities, devices, or indices quoted are for illustration solely and usually are not recommendatory. My views could also be biased, and I could select to not deal with facets that you simply think about vital. Your monetary targets could also be completely different. You’ll have a unique threat profile. You could be in a unique life stage than I’m in. Therefore, you will need to NOT base your funding choices based mostly on my writings. There isn’t a one-size-fits-all resolution in investments. What could also be a very good funding for sure traders might NOT be good for others. And vice versa. Due to this fact, learn and perceive the product phrases and situations and think about your threat profile, necessities, and suitability earlier than investing in any funding product or following an funding method.
