The Union Authorities revised capital positive factors tax charges by way of bulletins in Funds 2024. Lengthy-term capital positive factors 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.
Nevertheless, the most important supply of discontent got here for the actual property investments, the place the removing of the indexation profit all of the sudden elevated the notional tax legal responsibility for a lot of buyers, who owned non-performing actual property belongings. 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 factors 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 numerous IT sections, the place you may search reduction and keep away from paying taxes on long-term capital positive factors. If these tax adjustments are bothering you, you may search reduction below considered one of Sections 54, 54EC, and 54F.
Tips on how to keep away from taxes on Lengthy Time period Capital positive factors?
There are 3 methods.
- Part 54: Purchase a residential property (solely you’ve gotten bought a home)
- Part 54F: Purchase a residential property (when you have bought any capital asset besides home)
- Part 54EC: Purchase capital positive factors bonds (solely when you have bought a property, together with home)
These sections supply reduction from taxes solely on the long-term capital positive factors. No reduction from taxes on short-term capital positive factors.
Word: I’ve used “Residential home”, “residential home”, or simply “home” interchangeably on this publish. Residential Home/Residential Property/Home is such a property from the place the revenue as “Earnings from Home Property”.
There may be one other option to keep away from paying taxes. That’s by reserving losses someplace in your portfolio. This course of is named tax-loss harvesting. For extra on this matter, please consult with this publish. I’ll NOT focus on tax-loss harvesting on this publish.
I current a abstract about tax reduction from capital positive factors 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 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 may set off LTCG as much as Rs 10 crores below Part 54.
You ebook LTCG of Rs 12 crores on sale of home.
And you purchase a NEW home value Rs 12 crores.
Nevertheless, the tax profit might be prolonged to solely Rs 10 crores. On the remaining Rs 2 crores of LTCG, you will need to pay tax on capital positive factors.
Level to Word
- Solely LTCG: To save lots of taxes, you’ll want to make investments solely the Lengthy-term capital positive factors. Part 54 affords no reduction for short-term capital positive factors.
- Don’t promote the NEW home too quickly: In case you promote the NEW home (purchased to set off capital positive factors) inside 3 years of buy (completion of development), the acquisition price of the NEW Home shall be thought of NIL for dedication of capital positive factors. It is a option 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 buy as much as 2 properties and nonetheless take profit below Part 54. Nevertheless, this selection of shopping for 2 homes (and but taking profit below Part 54) can be exercised solely as soon as in your lifetime.
- Capital positive factors account: In case you are 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 will need to deposit these unutilized positive factors in Capital positive factors account. Subsequently, you may withdraw the quantity for buy/development of home inside timelines specified. I’ll clarify this later on this publish 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 factors account in the direction of buy/development of home inside timelines, the tax profit below Part 54 might be clawed again on the unutilized quantity. You’ll have to pay LTCG tax on the unutilized quantity.
Illustration
You acquire 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 value at the very least 75 lacs inside specified timelines.
Case 1
In case you purchase/assemble a home value Rs 40 lacs, then you definately 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). Word there may be one other restriction. The unutilized positive factors have to be invested inside 1 yr of sale of the OLD asset. Therefore, the deadline for depositing cash within the capital positive factors 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 will need to deposit the unutilized quantity from this Rs 75 lacs within the capital positive factors account earlier than submitting your ITR for FY2025 (not later than July 31, 2025).
Allow us to say you’ve gotten used Rs 10 lacs already for buy/development of home. You could deposit the remaining Rs 65 lacs within the Capital positive factors 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).
- In case you deposit solely Rs 50 lacs, then you might be telling the Authorities that the price of new property won’t be greater than 60 lacs (50+10). Therefore, you will need to deposit tax on LTCG value Rs 15 lacs (Rs 75 lacs – Rs 60 lacs) whereas submitting ITR for FY2025.
- You deposit Rs 50 lacs and make the most of your complete quantity inside specified timelines: No tax legal responsibility on LTCG
- In case you 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 may take profit below Part 54F on sale of any capital asset (shares, mutual funds, gold and so forth.)
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 will need to 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. In case you breach this rule, then the tax profit taken below Part 54 F might 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. In case you breach this rule, then the tax profit taken below Part 54 F might be clawed again.
Any cap on LTCG set-off
The profit below Part 54F is linked to funding of the web consideration. Therefore, you can not get away by reinvesting simply the capital positive factors. You could make investments the sale proceeds to get profit below this part.
Part 54F units the cap for web consideration at Rs 10 crores.
Case 1
You acquire shares for Rs 50 lacs. You bought these shares for Rs 1.25 crores (web consideration). LTCG of Rs 75 lacs.
If you wish to keep away from paying tax on your complete Rs 75 lacs, you will need to make investments your complete 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 factors might be lowered proportionately.
Allow us to say the price of the NEW home is Rs 90 lacs.
Quantity of reduction below Part 54F = LTCG * (Price of New home/Web 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 acquire shares for Rs 6 crores. Offered for Rs 15 crores. LTCG of Rs 9 crores.
You acquire a NEW home value Rs 13 crores.
Nevertheless, Part 54F caps the tax profit on web consideration of Rs 10 crores.
Whereas you’ll nonetheless get the tax profit, the profit might be calculated as if the price of the NEW home was Rs 10 crores.
Quantity of reduction below Part 54F = LTCG * (Price of New home/Web 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 might be exempt from tax. The remaining LTCG of Rs 3 crores might 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 may search reduction by simply investing the capital positive factors. Right here, you will need to make investments the gross sales proceed to get profit.
- Web consideration = Complete sale consideration acquired – Price incurred within the sale of the asset
- Don’t promote the NEW home too quickly: In case you promote the NEW home (purchased to set off capital positive factors) inside 3 years of buy (or completion of development), the tax profit might be clawed again. Below 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 positive factors quantity on which you averted paying tax by shopping for the NEW home might be taxed as capital positive factors.
- Part 54F does NOT offer you possibility to take a position gross sales proceeds in 2 residential homes
- Capital positive factors account: This is identical as for Part 54. Won’t repeat right here. Unutilized sale proceeds (and never simply the capital positive factors) have to be invested within the Capital positive factors 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 factors account inside specified timelines (2 years for buy and three years for development), the tax profit might be clawed again.
#3 Part 54EC (Offered property, Purchased capital positive factors bonds)
OLD/SOLD asset: Property (doesn’t essentially must be a residential property)
NEW Asset (to be purchased): Capital positive factors bonds
What are Capital Beneficial properties Bonds?
NHAI and REC are permitted to subject capital positive factors bonds. These bonds have maturity of 5 years.
The present price of curiosity is 5.25% each year. The curiosity revenue is taxable.
Pre-conditions and Timelines
- You could make investments the long-term positive factors within the capital positive factors bond inside 6 months from the date of sale of OLD asset/property.
- You can’t promote these capital positive factors bonds till maturity (5 years). In case you promote earlier than maturity, the tax profit might be clawed again.
- You can’t monetize these bonds in any method. Even should you take mortgage towards these bonds, the tax profit taken might be clawed again.
Any cap on LTCG set-off
You may set off LTCG solely as much as Rs 50 lacs by investing in capital positive factors bonds below 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 positive factors bonds. Even should you make investments extra, the tax reduction might be capped at 50 lacs.
Exempt LTCG = 50 lacs
Taxable LTCG = Rs 80 lacs – Rs 50 lacs = Rs 30 lacs
Can I search reduction below a couple of Part?
As I see, there isn’t a restriction on claiming reduction below greater than 1 part.
Nevertheless, as we’ve got seen above, the OLD asset (bought) have to be eligible for reduction below two sections.
Part 54: OLD asset have to be a residential property
Part 54F: OLD asset could be any asset count on residential home
Part 54EC: OLD asset be any property, however not essentially a residential property.
So, when you have bought a residential home, you may declare reduction below each Part 54 and Part 54EC.
Different, when you have bought a business property, you may declare reduction below each Part 54F and 54 EC.
Do contemplate the price of saving taxes
Once you purchase a home, you will need to additionally pay stamp obligation. Stamp obligation is a state topic and can range throughout states. That is an extra price to you. Shopping for a home might contain different prices reminiscent of brokerage too. Allow us to say this complete extra 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 funding), you may need to rethink your choice contemplating these prices.
It’s possible you’ll not need to purchase a home value Rs 1 crore (earlier than stamp obligation and prices) simply to save lots of tax on LTCG value Rs 5 lacs.
The capital positive factors bonds (Part 54EC) haven’t any extra price of funding, however you will need to contemplate the low and taxable rate of interest provided 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 fastened revenue portfolio, the capital positive factors bonds appear choice to me after contemplating the taxes saved on LTCG.
LTCG on sale of home is Rs 30 lacs. In case you make investments Rs 30 lacs in capital positive factors 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 alleged to be difficult to cowl all eventualities and supply exemptions. Whereas I’ve written this publish to one of the best of my understanding, I’m not a tax knowledgeable. My data could also be incomplete. You’re suggested to seek the advice of a Chartered Account earlier than taking any motion primarily based on the contents on this publish.
Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM by no means assure efficiency of the middleman or present any assurance of returns to buyers. Funding in securities market is topic to market dangers. Learn all of the associated paperwork fastidiously earlier than investing.
This publish is for schooling objective alone and is NOT funding recommendation. This isn’t a advice to take a position 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’ll select to not deal with elements that you simply contemplate vital. Your monetary objectives could also be completely different. You could have a distinct danger profile. It’s possible you’ll be in a distinct life stage than I’m in. Therefore, you will need to NOT base your funding choices primarily based on my writings. There isn’t any one-size-fits-all answer in investments. What could also be funding for sure buyers might NOT be good for others. And vice versa. Subsequently, learn and perceive the product phrases and circumstances and contemplate your danger profile, necessities, and suitability earlier than investing in any funding product or following an funding strategy.
