No Indexation Profit if property offered at a loss

The Authorities took away the indexation profit for properties in Funds 2024.

After receiving suggestions, the Authorities relented and gave again the indexation profit to properties purchased earlier than July 23, 2024.

Now, you’d assume that, for the properties purchased earlier than July 23, 2024, there is no such thing as a change in capital positive aspects taxation. Every little thing is again to regular.

That’s the understanding most of us have, isn’t it?

Nevertheless, that’s not solely right in case your property funding has made solely gentle positive aspects and even suffered losses.

When a property funding does NOT carry out properly, you get aid in 2 methods.

1. You could not need to pay a lot (or any) capital positive aspects tax on the sale of such an funding. No capital acquire, no capital positive aspects tax.
2. Extra importantly, in case you guide a capital loss, you may make the most of this loss to set off capital positive aspects from sale of different capital belongings in the identical yr or within the coming yr. This may cut back your tax legal responsibility in the identical yr or within the coming years. And indexation performs an enormous function in decreasing taxable capital positive aspects OR growing capital losses.

Whereas the Authorities has doled out the carrot of relenting on the indexation profit for the properties purchased earlier than July 23, 2024, it has well taken away the profit as laid out in (2).

Therefore, in case your property funding was purchased earlier than July 23, 2024 or has underperformed, you’d get indexation profit ONLY to REDUCE your Capital GAINS, however NOT to INCREASE your Capital LOSSES.  Fairly a bit hit in my view.

Furthermore, in case you are an NRI, you haven’t even been supplied this aid. This aid is obtainable solely to Resident People.

Let’s talk about all this and extra with examples on this publish.

The Backdrop

Earlier than Funds 2024 bulletins, any long-term capital positive aspects (holding interval > 2 years) on sale of property had been taxed at 20% (after indexation).

Earlier than Funds 2024 (20% With Indexation)

Lengthy Time period Capital Acquire/Loss = Sale worth – Listed price of buy/enchancment

Tax at 20% on such calculated LTCG.

Funds 2024 took the good thing about indexation away from actual property transactions.

After Funds 2024 (12.5% With out Indexation)

Lengthy Time period Capital Positive aspects/Loss = Sale worth – Value of buy/enchancment

Tax at 12.5% on such calculated LTCG.

The Leisure for Property Transactions however with Caveats

After receiving suggestions from numerous stakeholders, the Authorities reinstated the indexation profit for properties purchased earlier than July 23, 2024, however with caveats.

Let’s contemplate an instance.

You promote a property purchased earlier than July 23, 2024, after holding it for two years.

For the reason that holding interval is bigger than 2 years, the ensuing positive aspects will probably be thought-about long-term capital positive aspects.

Calculate the next two quantities.

1. LTCG1 = Sale worth – Value Value. TaxLiability1 = 12.5% * LTCG1
2. LTCG2 = Sale worth – Listed Value of Buy. TaxLiability2 = 20% * LTCG2

Your tax legal responsibility would be the decrease of the 2 calculated tax liabilities.

Your ultimate tax legal responsibility = Decrease (TaxLiability1, TaxLiability2)

This appears to recommend that the Authorities has stored issues unchanged for the properties purchased earlier than July 23, 2024.

Sadly, issues will not be the identical. We will even perceive this with the assistance of illustrations later within the publish.

Earlier than we delve upon the issue with leisure (or reasonably how that is worded), let’s first see how the Authorities has effected these modifications (Funds 2024 and the next leisure).

Which Sections of Revenue Tax specify Capital Positive aspects Taxation?

Part 2(42A): specifies the holding interval for long run capital positive aspects.

Part 48: specifies how one can calculate long-term capital positive aspects.

Brief-term capital positive aspects are added to your revenue and taxed at respective slab charge. Part 111A makes an exception for shares and fairness mutual funds.

Part 112: specifies the tax charges for long run capital positive aspects. Part 112A makes an exception for shares and fairness funds.

Within the Funds 2024, the indexation profit was withdrawn by means of modification to Part 48. The tax charges on LTCG had been modified by means of modification to Part 112. Whereas enjoyable the indexation profit, the Authorities has not made any modifications to Part 48, however solely Part 112.

How has the Authorities introduced this variation (leisure)?

The Authorities has introduced this leisure by amending Part 112 (and never Part 48).

Primarily, the Authorities has NOT modified the methodology of calculating the capital acquire/loss for properties purchased earlier than July 23, 2024. The capital positive aspects calculation stays the identical (as modified by means of Funds 2024).

Lengthy Time period Capital Acquire = Sale Value – Value of Property (Laid out in Part 48). Discover there’s nonetheless no indexation profit.

The Authorities has solely modified the best way the tax is calculated. Beneath Part 112.

On the time of calculation of tax legal responsibility, it says calculate tax legal responsibility underneath each strategies. 12.5% with out indexation. And 20% with indexation. And pay the decrease tax legal responsibility. (Laid out in Part 112).

Copying an excerpt from the Finance Act (2), 2024

This presents a singular problem.

You might be detached in case your actual property funding has paid off properly. Nevertheless, you will have an issue in case your actual property funding has made solely gentle positive aspects or losses.

What if there is no such thing as a acquire? What if there’s a loss?

Even within the case of capital loss, there are 2 prospects.

1. To procure for Rs 30 lacs and offered for Rs 28 lacs. That may be a clear nominal loss.
2. To procure for Rs 30 lacs and offered for Rs 35 lacs. No nominal loss. However the listed price of buy is Rs 45 lacs.

The comfort supplied to actual property traders by means of modification to Finance Invoice, 2024 will be certain that you don’t pay larger taxes (than you’d have if indexation had been allowed).

Nevertheless, this doesn’t give you aid on capital losses (carry ahead loss). With indexation profit, you’d have booked a a lot larger capital loss. The next capital loss/carry ahead loss can be utilized to scale back capital positive aspects tax legal responsibility in the identical yr or within the coming years.

Briefly, you don’t pay extra tax, however there’s a chance that you simply guide a decrease capital loss (or carry ahead decrease loss) after Funds 2024 modifications regardless of the relief.

Let’s perceive this with the assistance of some illustrations.

Illustrations: For Capital positive aspects tax calculation

We contemplate 4 situations.

1. Good Revenue (Value: Rs 30 lacs, Sale Value: Rs 60 lacs)
2. Gentle Revenue (Value: Rs 30 lacs, Sale Value: Rs 35 lacs)
3. Gentle Loss (Value: Rs 30 lacs, Sale Value: Rs 28 lacs)
4. Heavy Loss (Value: Rs 30 lacs, Sale Value: Rs 20 lacs)

Give attention to the ultimate tax paid and the capital loss/carry ahead loss.

No issues within the above instance.

Capital Positive aspects Tax Legal responsibility is similar (as anticipated).

However, underneath the previous methodology, you’d have booked lack of Rs 10.37 lacs. You might have used this loss to set off capital positive aspects from sale of, say, shares and prevented paying capital positive aspects tax of 10.37 lacs * 12.5% = ~1.30 lacs.

However with the elimination of indexation profit (New Methodology), you don’t get to guide this capital loss. That’s a destructive for you.

CG Tax is similar, however discover the distinction between the capital loss booked.

Tax legal responsibility is similar, however the capital loss is far larger underneath the previous methodology (with indexation).

As you may see, the ultimate tax to be paid (or to not be paid) is similar underneath each previous and new methodology. However the capital loss/carry ahead loss is completely different.

This occurred as a result of the Authorities didn’t change the calculation of capital positive aspects underneath Part 48. It solely supplied leisure on the taxes by permitting traders to pay a decrease tax underneath Part 112.

For the reason that capital positive aspects/loss calculation doesn’t embody indexation anymore, the capital loss (if any) goes down drastically.

Non-residents (NRIs) have been short-changed

We noticed earlier within the publish the indexation profit is accessible on sale of properties purchased earlier than July 23, 2024, however there have been caveats.

If you’re an NRI, there’s extra dangerous information.

1. The indexation profit shall NOT be out there to Non-residents (NRIs), even for properties purchased earlier than July 23, 2024.
2. The selection of paying taxes at 12.5% (with out indexation) or 20% (with indexation) for properties purchased earlier than July 23, 2024 is accessible solely to resident people and HUFs.
3. So, in case you are an NRI and have offered a property on or after July 23, 2024, you do NOT get indexation profit. Being an NRI, you pay tax on LTCG at 12.5%.

All of the illustrations proven earlier within the publish are just for resident people.

For NRIs, there is no such thing as a selection between 12.5% with out indexation or 20% after indexation.

Disclaimer: I’m not a tax skilled and there could also be gaps in my understanding. Please seek the advice of a chartered accountant earlier than performing on the contents of this publish.

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This publish is for schooling goal alone and is NOT funding recommendation. This isn’t a advice to speculate or NOT put money into any product. The securities, devices, or indices quoted are for illustration solely and will not be recommendatory. My views could also be biased, and I’ll select to not give attention to elements that you simply contemplate necessary. Your monetary objectives 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 should 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. Due to this fact, learn and perceive the product phrases and circumstances and contemplate your threat profile, necessities, and suitability earlier than investing in any funding product or following an funding strategy.