The Union Authorities revised capital positive factors tax charges by means of bulletins in Price range 2024. Lengthy-term capital positive factors on the sale of any capital asset shall be taxed at 12.5% with out indexation.
As with all change, sure classes of investments (overseas fairness/ gold MFs) benefited whereas the others (shares and mutual funds) misplaced marginally.
Nevertheless, the most important supply of discontent got here for the true 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 property. 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 durations and tax charges, it has not made any modifications to varied IT sections, the place you may search reduction and keep away from paying taxes on long-term capital positive factors. If these tax modifications 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 offered a home)
- Part 54F: Purchase a residential property (when you have offered any capital asset besides home)
- Part 54EC: Purchase capital positive factors bonds (solely when you have offered 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.
Notice: 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 “Revenue from Home Property”.
There may be one other approach 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 subject, 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 should be bought or in-built India.
- You MUST PURCHASE a residential home inside a interval of 1 12 months 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 possibly can set off LTCG as much as Rs 10 crores below Part 54.
You e book LTCG of Rs 12 crores on sale of home.
And you purchase a NEW home price Rs 12 crores.
Nevertheless, the tax profit will probably be prolonged to solely Rs 10 crores. On the remaining Rs 2 crores of LTCG, you have to pay tax on capital positive factors.
Level to Notice
- Solely LTCG: To avoid wasting taxes, you want to make investments solely the Lengthy-term capital positive factors. Part 54 presents no reduction for short-term capital positive factors.
- Don’t promote the NEW home too quickly: For those who promote the NEW home (purchased to set off capital positive factors) inside 3 years of buy (completion of building), the acquisition value of the NEW Home shall be thought of NIL for dedication of capital positive factors. It is a approach to claw again the tax-benefit in the event 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 purchase 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 12 months (not later than tax-filing due date), whichever is earlier, then you have to deposit these unutilized positive factors in Capital positive factors account. Subsequently, you may withdraw the quantity for buy/building 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 direction of buy/building of home inside timelines, the tax profit below Part 54 will probably be clawed again on the unutilized quantity. You’ll have to pay LTCG tax on the unutilized quantity.
Illustration
You got a home for Rs 50 lacs in 2019. You offered the home in 2024 (after July 23, 2024) for Rs 1.25 crores. Say you offered 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 achieve, you have to purchase (or assemble) a home price not less than 75 lacs inside specified timelines.
Case 1
For those who purchase/assemble a home price 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 Revenue tax return for FY2025 (not later than the due date, which is normally July 31). Notice there may be one other restriction. The unutilized positive factors should be invested inside 1 12 months 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 12 months from the date of sale of OLD home/asset (August 5, 2024 + 1 12 months = 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 have 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 used Rs 10 lacs already for buy/building of home. You will need to deposit the remaining Rs 65 lacs within the Capital positive factors account.
- If you don’t deposit something in CG account, you have to pay tax on the remaining Rs 65 lacs LTCG whereas submitting ITR for FY2025 (or as advance tax).
- For those who deposit solely Rs 50 lacs, then you might be telling the Authorities that the price of new property is not going to be greater than 60 lacs (50+10). Therefore, you have to deposit tax on LTCG price 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
- For those who deposit Rs 50 lacs however make the most of solely Rs 30 lacs inside specified timelines: Then you have to pay tax on the unutilized LTCG of Rs 20 lacs (50 lacs – 30 lacs). Keep 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 possibly can 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 should be bought or in-built India.
- You MUST PURCHASE a residential home (NEW asset) inside a interval of 1 12 months 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 have to not personal greater than 1 residential home (excluding the NEW home).
- You will need to not buy one other residential property (home), aside from the NEW home, inside 1 12 months from the date of sale of OLD asset. For those who breach this rule, then the tax profit taken below Part 54 F will probably be clawed again.
- You will need to not assemble one other residential property (home), aside from the NEW home, inside 3 years from the date of sale of OLD asset. For those who breach this rule, then the tax profit taken below Part 54 F will probably 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’t get away by reinvesting simply the capital positive factors. You will need to make investments the sale proceeds to get profit below this part.
Part 54F units the cap for internet consideration at Rs 10 crores.
Case 1
You got shares for Rs 50 lacs. You offered these shares for Rs 1.25 crores (internet consideration). LTCG of Rs 75 lacs.
If you wish to keep away from paying tax on your complete Rs 75 lacs, you have 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 will probably be decreased 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/Internet 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 got shares for Rs 6 crores. Offered for Rs 15 crores. LTCG of Rs 9 crores.
You got a NEW home price Rs 13 crores.
Nevertheless, Part 54F caps the tax profit on internet consideration of Rs 10 crores.
Whereas you’ll nonetheless get the tax profit, the profit will probably 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/Internet Consideration)
= Rs 9 crores * (10 crores/15 crores) = Rs 6 crores.
Notice how Rs 13 crores has been changed by 10 crores within the numerator.
On this case, solely Rs 6 crores will probably be exempt from tax. The remaining LTCG of Rs 3 crores will probably be topic to taxes.
Level to Notice
- You will need to 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 have to make investments the gross sales proceed to get profit.
- Internet consideration = Complete sale consideration acquired – Price incurred within the sale of the asset
- Don’t promote the NEW home too quickly: For those who promote the NEW home (purchased to set off capital positive factors) inside 3 years of buy (or completion of building), the tax profit will probably be clawed again. Beneath Part 54, the price of the New Asset was thought of NIL in such instances. Nevertheless, in Part 54F, there isn’t a such provision. The capital positive factors quantity on which you prevented paying tax by shopping for the NEW home will probably be taxed as capital positive factors.
- Part 54F does NOT provide you with choice to speculate gross sales proceeds in 2 residential homes
- Capital positive factors account: This is identical as for Part 54. Is not going to repeat right here. Unutilized sale proceeds (and never simply the capital positive factors) should be invested within the Capital positive factors account inside 12 months or earlier than submitting your taxes for the monetary 12 months (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 building), the tax profit will probably be clawed again.
#3 Part 54EC (Offered property, Purchased capital positive factors bonds)
OLD/SOLD asset: Property (doesn’t essentially need to be a residential property)
NEW Asset (to be purchased): Capital positive factors bonds
What are Capital Good points Bonds?
NHAI and REC are permitted to challenge capital positive factors bonds. These bonds have maturity of 5 years.
The present fee of curiosity is 5.25% each year. The curiosity revenue is taxable.
Pre-conditions and Timelines
- You will need to 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). For those who promote earlier than maturity, the tax profit will probably be clawed again.
- You can’t monetize these bonds in any method. Even in the event you take mortgage in opposition to these bonds, the tax profit taken will probably be clawed again.
Any cap on LTCG set-off
You possibly can 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 in the event you make investments extra, the tax reduction will probably 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 have now seen above, the OLD asset (offered) should be eligible for reduction below two sections.
Part 54: OLD asset should be a residential property
Part 54F: OLD asset may be any asset count on residential home
Part 54EC: OLD asset be any property, however not essentially a residential property.
So, when you have offered a residential home, you may declare reduction below each Part 54 and Part 54EC.
Various, when you have offered 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 have to additionally pay stamp responsibility. Stamp responsibility is a state topic and can fluctuate throughout states. That is an extra value to you. Shopping for a home might contain different prices resembling brokerage too. Allow us to say this whole extra value is 7% of the price of the New home.
Now, if you’re shopping for a home simply to avoid wasting taxes (and never since you wish to keep there or since you see the home as a great funding), you may wish to rethink your choice contemplating these prices.
You might not wish to purchase a home price Rs 1 crore (earlier than stamp responsibility and prices) simply to avoid wasting tax on LTCG price Rs 5 lacs.
The capital positive factors bonds (Part 54EC) don’t have any extra value of funding, however you have 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 have to respect the chance value. Nevertheless, if you’re not a particularly aggressive investor and are keen to think about these bonds as a part of your mounted revenue portfolio, the capital positive factors bonds appear a great choice to me after contemplating the taxes saved on LTCG.
LTCG on sale of home is Rs 30 lacs. For those who 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 spend money on these bonds, you pay 12.5% tax. Rs 3.75 lacs. The remaining Rs 26.25 lacs may be invested as per your alternative.
Disclaimer: Revenue Tax guidelines are difficult and are speculated to be difficult to cowl all situations 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 based mostly 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 rigorously earlier than investing.
This publish is for schooling objective alone and is NOT funding recommendation. This isn’t a advice to speculate 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 could select to not concentrate on elements that you just contemplate vital. Your monetary targets could also be totally different. You’ll have a special danger profile. You might be in a special life stage than I’m in. Therefore, you have to NOT base your funding selections based mostly on my writings. There isn’t a one-size-fits-all answer in investments. What could also be a great funding for sure buyers might NOT be good for others. And vice versa. Due to this fact, 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.