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 isn’t a change in capital beneficial properties taxation. The whole lot is again to regular.

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

Nevertheless, that’s not completely appropriate in case your property funding has made solely delicate beneficial properties 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 beneficial properties tax on the sale of such an funding. No capital acquire, no capital beneficial properties tax.
2. Extra importantly, for those who e-book a capital loss, you possibly can make the most of this loss to set off capital beneficial properties from sale of different capital belongings in the identical yr or within the coming yr. This could scale back your tax legal responsibility in the identical yr or within the coming years. And indexation performs a giant position in decreasing taxable capital beneficial properties OR rising 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, if you’re an NRI, you haven’t even been provided this aid. This aid is obtainable solely to Resident People.

Let’s focus on all this and extra with examples on this put up.

The Backdrop

Earlier than Funds 2024 bulletins, any long-term capital beneficial properties (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 Achieve/Loss = Sale value – Listed price of buy/enchancment

Tax at 20% on such calculated LTCG.

Funds 2024 took the advantage of indexation away from actual property transactions.

After Funds 2024 (12.5% With out Indexation)

Lengthy Time period Capital Positive aspects/Loss = Sale value – Price of buy/enchancment

Tax at 12.5% on such calculated LTCG.

The Leisure for Property Transactions however with Caveats

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

Let’s think about an instance.

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

Because the holding interval is bigger than 2 years, the ensuing beneficial properties will probably be thought of long-term capital beneficial properties.

Calculate the next two quantities.

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

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

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

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

Sadly, issues should not the identical. We will even perceive this with the assistance of illustrations later within the put up.

Earlier than we delve upon the issue with leisure (or quite 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 beneficial properties.

Part 48: specifies easy methods to calculate long-term capital beneficial properties.

Brief-term capital beneficial properties are added to your earnings and taxed at respective slab price. Part 111A makes an exception for shares and fairness mutual funds.

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

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

How has the Authorities introduced this modification (leisure)?

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

Basically, the Authorities has NOT modified the methodology of calculating the capital acquire/loss for properties purchased earlier than July 23, 2024. The capital beneficial properties calculation stays the identical (as modified via Funds 2024).

Lengthy Time period Capital Achieve = Sale Value – Price 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. Below Part 112.

On the time of calculation of tax legal responsibility, it says calculate tax legal responsibility beneath 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 novel problem.

You might be detached in case your actual property funding has paid off properly. Nevertheless, you’ve got an issue in case your actual property funding has made solely delicate beneficial properties or losses.

What if there isn’t a acquire? What if there’s a loss?

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

1. You acquire for Rs 30 lacs and offered for Rs 28 lacs. That could be a clear nominal loss.
2. You acquire 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 buyers via modification to Finance Invoice, 2024 will make sure that you don’t pay greater 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 greater capital loss. The next capital loss/carry ahead loss can be utilized to cut back capital beneficial properties 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 e-book a decrease capital loss (or carry ahead decrease loss) after Funds 2024 modifications regardless of the comfort.

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

Illustrations: For Capital beneficial properties tax calculation

We think about 4 eventualities.

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

However, beneath the outdated methodology, you’d have booked lack of Rs 10.37 lacs. You can have used this loss to set off capital beneficial properties from sale of, say, shares and averted paying capital beneficial properties tax of 10.37 lacs * 12.5% = ~1.30 lacs.

However with the removing of indexation profit (New Methodology), you don’t get to e-book this capital loss. That’s a damaging for you.

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

Tax legal responsibility is identical, however the capital loss is way greater beneath the outdated methodology (with indexation).

As you possibly can see, the ultimate tax to be paid (or to not be paid) is identical beneath each outdated and new methodology. However the capital loss/carry ahead loss is totally different.

This occurred as a result of the Authorities didn’t change the calculation of capital beneficial properties beneath Part 48. It solely provided leisure on the taxes by permitting buyers to pay a decrease tax beneath Part 112.

Because the capital beneficial properties/loss calculation doesn’t embrace indexation anymore, the capital loss (if any) goes down drastically.

Non-residents (NRIs) have been short-changed

We noticed earlier within the put up the indexation profit is on the market 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 accessible 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 on the market solely to resident people and HUFs.
3. So, if you’re 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 put up are just for resident people.

For NRIs, there isn’t a alternative between 12.5% with out indexation or 20% after indexation.

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

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 buyers. Funding in securities market is topic to market dangers. Learn all of the associated paperwork fastidiously earlier than investing.

This put up is for training objective alone and is NOT funding recommendation. This isn’t a suggestion to take a position or NOT spend money on any product. The securities, devices, or indices quoted are for illustration solely and should not recommendatory. My views could also be biased, and I’ll select to not give attention to features that you simply think about necessary. Your monetary targets could also be totally different. You might have a special danger profile. You could be in a special life stage than I’m in. Therefore, you should NOT base your funding selections based mostly on my writings. There isn’t any one-size-fits-all resolution in investments. What could also be funding for sure buyers could NOT be good for others. And vice versa. Subsequently, learn and perceive the product phrases and circumstances and think about your danger profile, necessities, and suitability earlier than investing in any funding product or following an funding strategy.