No Indexation Profit if property offered at a loss

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

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

Now, you’ll assume that, for the properties purchased earlier than July 23, 2024, there is no such thing as a change in capital good points taxation. All the things is again to regular.

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

Nevertheless, that’s not completely right in case your property funding has made solely delicate good points and even suffered losses.

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

1. You might not need to pay a lot (or any) capital good points tax on the sale of such an funding. No capital acquire, no capital good points tax.
2. Extra importantly, if you happen to guide a capital loss, you may make the most of this loss to set off capital good points from sale of different capital property in the identical 12 months or within the coming 12 months. This may cut back your tax legal responsibility in the identical 12 months or within the coming years. And indexation performs a giant function in lowering taxable capital good points 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’ll 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 supplied 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 Finances 2024 bulletins, any long-term capital good points (holding interval > 2 years) on sale of property had been taxed at 20% (after indexation).

Earlier than Finances 2024 (20% With Indexation)

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

Tax at 20% on such calculated LTCG.

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

After Finances 2024 (12.5% With out Indexation)

Lengthy Time period Capital Features/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 think about 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 good points will likely be thought of long-term capital good points.

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 last tax legal responsibility = Decrease (TaxLiability1, TaxLiability2)

This appears to counsel that the Authorities has saved 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 put up.

Earlier than we delve upon the issue with rest (or moderately how that is worded), let’s first see how the Authorities has effected these adjustments (Finances 2024 and the next rest).

Which Sections of Earnings Tax specify Capital Features Taxation?

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

Part 48: specifies the best way to calculate long-term capital good points.

Brief-term capital good points are added to your earnings 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 good points. Part 112A makes an exception for shares and fairness funds.

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

How has the Authorities introduced this variation (rest)?

The Authorities has introduced this rest 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 good points calculation stays the identical (as modified by Finances 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. Below 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 will be detached in case your actual property funding has paid off effectively. Nevertheless, you have got an issue in case your actual property funding has made solely delicate good points 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 potentialities.

1. You purchased for Rs 30 lacs and offered for Rs 28 lacs. That could be a clear nominal loss.
2. You purchased for Rs 30 lacs and offered for Rs 35 lacs. No nominal loss. However the listed value of buy is Rs 45 lacs.

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

Nevertheless, this doesn’t give you aid on capital losses (carry ahead loss). With indexation profit, you’ll have booked a a lot larger capital loss. The next capital loss/carry ahead loss can be utilized to scale back capital good points tax legal responsibility in the identical 12 months or within the coming years.

Briefly, you don’t pay extra tax, however there’s a risk that you simply guide a decrease capital loss (or carry ahead decrease loss) after Finances 2024 adjustments regardless of the comfort.

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

Illustrations: For Capital good points tax calculation

We think about 4 situations.

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

Concentrate on the ultimate tax paid and the capital loss/carry ahead loss.

No issues within the above instance.

Capital Features Tax Legal responsibility is similar (as anticipated).

However, underneath the previous technique, you’ll have booked lack of Rs 10.37 lacs. You would have used this loss to set off capital good points from sale of, say, shares and prevented paying capital good points tax of 10.37 lacs * 12.5% = ~1.30 lacs.

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

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

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

As you may see, the ultimate tax to be paid (or to not be paid) is similar underneath each previous and new technique. 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 good points underneath Part 48. It solely supplied rest on the taxes by permitting traders to pay a decrease tax underneath Part 112.

For the reason that capital good points/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 offered on sale of properties purchased earlier than July 23, 2024, however there have been caveats.

In case you are an NRI, there’s extra unhealthy 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 offered 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 is no such thing as a alternative between 12.5% with out indexation or 20% after indexation.

Disclaimer: I’m not a tax knowledgeable 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.

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This put up is for training function 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 will not be recommendatory. My views could also be biased, and I could select to not concentrate on facets that you simply think about necessary. Your monetary objectives could also be completely different. You might have a unique danger profile. You might 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 answer in investments. What could also be an excellent funding for sure traders might NOT be good for others. And vice versa. Subsequently, learn and perceive the product phrases and situations and think about your danger profile, necessities, and suitability earlier than investing in any funding product or following an funding method.