The rules for long-term capital gains (LTCG) on property sales have changed with the recent budget announcement. Before this change, LTCG from property sales were taxed at 10% with indexation benefits. Now, according to the latest Budget documents, the new tax rate for long-term capital gains on property sales will be 12.5% without the indexation benefit. This article aims to explain this new tax rule and its impact on property sellers.
What Are Long-Term Capital Gains?
Long-term capital gains are the profit made from selling a property that you have owned for more than 24 months. These gains are taxed differently from short-term capital gains, which come from selling property you have owned for a shorter time.
Old Tax Rules: 10% with Indexation Benefits
Under the old rules, long-term capital gains on property sales were taxed at 10%, and this included the benefit of indexation. Indexation adjusts the purchase price of a property for inflation, which reduces the taxable gain.
Example of Indexation Benefit
For example, if you bought a property for ₹10,00,000 in 2000 and sold it for ₹30,00,000 in 2020, the gain would be ₹20,00,000 without indexation. With indexation, the purchase price might be adjusted to ₹15,00,000, reducing the taxable gain to ₹15,00,000, which is then taxed at 10%.
New Tax Rules: 12.5% Without Indexation Benefit
The new tax rules remove the indexation benefit and set a flat tax rate of 12.5% on long-term capital gains. This makes the calculation simpler but can increase the tax amount for property sellers.
Impact of the New Tax Rate
- Higher Tax Amount: Without the indexation benefit, the whole profit from the sale is taxed, leading to a higher tax amount.
- Easier Calculation: The removal of indexation makes it simpler to calculate the tax.
Comparison of Old vs. New Tax Rules
To understand the impact of the new tax rules, let’s compare the tax amounts under both the old and new systems.
Scenario 1: Old Rules
- Purchase Price: ₹10,00,000
- Sale Price: ₹30,00,000
- Indexed Purchase Price: ₹15,00,000 (assuming indexation adjustment)
- Capital Gain: ₹15,00,000
- Tax Rate: 10%
- Tax Amount: ₹1,50,000
Scenario 2: New Rules
- Purchase Price: ₹10,00,000
- Sale Price: ₹30,00,000
- Capital Gain: ₹20,00,000
- Tax Rate: 12.5%
- Tax Amount: ₹2,50,000
From the above examples, it is clear that the tax amount under the new rules is higher because of the removal of indexation benefits.
Ways to Reduce Higher Tax Amount
Given the higher tax under the new rules, property sellers can consider the following ways to reduce their tax amount:
1. Investing in Capital Gains Bonds
One way to save on long-term capital gains tax is by investing the money in capital gains bonds issued by entities like the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC). These bonds have a lock-in period of 5 years and offer a fixed interest rate, providing a safe investment option while saving on taxes.
2. Reinvesting in Residential Property
Another method to save on LTCG tax is by reinvesting the capital gains into a new residential property. According to Section 54 of the Income Tax Act, if you reinvest the capital gains in a new residential property within two years from the date of sale, the gains are exempt from tax.
3. Using the Benefit of Carry Forward of Losses
If a property sale results in a long-term capital loss, you can carry forward this loss for up to 8 consecutive years. You can set off this carried-forward loss against any future long-term capital gains, reducing future tax amounts.
Conclusion
The recent change in the tax rules for long-term capital gains on property sales is a significant shift from the old system. The increase in the tax rate to 12.5% without the indexation benefit results in a higher tax amount for property sellers. However, by using strategies such as investing in capital gains bonds, reinvesting in residential property, and using the carry forward of losses, you can effectively manage and reduce your tax amounts.
