The Authorities took away the indexation profit for properties in Price range 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 isn’t any change in capital features taxation. Every thing is again to regular.

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

Nonetheless, that’s not fully appropriate in case your property funding has made solely gentle features and even suffered losses.

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

1. You could not should pay a lot (or any) capital features tax on the sale of such an funding. No capital acquire, no capital features tax.
2. Extra importantly, when you guide a capital loss, you’ll be able to make the most of this loss to set off capital features from sale of different capital property in the identical yr or within the coming yr. This may scale back your tax legal responsibility in the identical yr or within the coming years. And indexation performs an enormous position in lowering taxable capital features 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 neatly 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 for my part.

Furthermore, if you’re an NRI, you haven’t even been provided this reduction. This reduction is obtainable solely to Resident People.

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

The Backdrop

Earlier than Price range 2024 bulletins, any long-term capital features (holding interval > 2 years) on sale of property have been taxed at 20% (after indexation).

Earlier than Price range 2024 (20% With Indexation)

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

Tax at 20% on such calculated LTCG.

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

After Price range 2024 (12.5% With out Indexation)

Lengthy Time period Capital Beneficial properties/Loss = Sale value – Price of buy/enchancment

Tax at 12.5% on such calculated LTCG.

The Rest 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 contemplate 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 larger than 2 years, the ensuing features will probably be thought of long-term capital features.

Calculate the next two quantities.

1. LTCG1 = Sale value – Price Worth. 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 last tax legal responsibility = Decrease (TaxLiability1, TaxLiability2)

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

Sadly, issues usually are not the identical. We may also perceive this with the assistance of illustrations later within the publish.

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

Which Sections of Earnings Tax specify Capital Beneficial properties Taxation?

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

Part 48: specifies methods to calculate long-term capital features.

Quick-term capital features are added to your revenue 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 features. Part 112A makes an exception for shares and fairness funds.

Within the Price range 2024, the indexation profit was withdrawn by way of modification to Part 48. The tax charges on LTCG have been modified by way of 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 transformation (rest)?

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

Primarily, the Authorities has NOT modified the methodology of calculating the capital acquire/loss for properties purchased earlier than July 23, 2024. The capital features calculation stays the identical (as modified by way of Price range 2024).

Lengthy Time period Capital Acquire = Sale Worth – Price of Property (Laid out in Part 48). Discover there may be nonetheless no indexation profit.

The Authorities has solely modified the way in which the tax is calculated. Beneath Part 112.

On the time of calculation of tax legal responsibility, it says calculate tax legal responsibility below 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. Nonetheless, you could have an issue in case your actual property funding has made solely gentle features or losses.

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

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

1. You obtain for Rs 30 lacs and offered for Rs 28 lacs. That could be a clear nominal loss.
2. You obtain 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 way of modification to Finance Invoice, 2024 will be sure that you don’t pay larger taxes (than you’ll have if indexation have been allowed).

Nonetheless, this doesn’t offer you reduction on capital losses (carry ahead loss). With indexation profit, you’ll have booked a a lot larger capital loss. A better capital loss/carry ahead loss can be utilized to cut back capital features 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 guide a decrease capital loss (or carry ahead decrease loss) after Price range 2024 adjustments regardless of the relief.

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

Illustrations: For Capital features tax calculation

We contemplate 4 situations.

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

Deal with the ultimate tax paid and the capital loss/carry ahead loss.

No issues within the above instance.

Capital Beneficial properties Tax Legal responsibility is similar (as anticipated).

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

However with the elimination of indexation profit (New Methodology), you don’t get to guide this capital loss. That’s a unfavourable 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 far larger below the previous technique (with indexation).

As you’ll be able to see, the ultimate tax to be paid (or to not be paid) is similar below 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 features below Part 48. It solely provided rest on the taxes by permitting traders to pay a decrease tax below Part 112.

For the reason that capital features/loss calculation doesn’t embody indexation anymore, the capital loss (if any) goes down drastically.

Non-residents (NRIs) have been short-changed

We noticed earlier within the publish 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 may be extra dangerous information.

1. The indexation profit shall NOT be out there 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 publish are just for resident people.

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

Disclaimer: I’m not a tax skilled and there could also be gaps in my understanding. Please seek the advice of a chartered accountant earlier than performing on the contents of 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 traders. Funding in securities market is topic to market dangers. Learn all of the associated paperwork rigorously earlier than investing.

This publish is for schooling goal alone and is NOT funding recommendation. This isn’t a advice to speculate 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 concentrate on points that you simply contemplate essential. Your monetary objectives could also be completely different. You might have a distinct threat profile. You could be in a distinct life stage than I’m in. Therefore, you need to NOT base your funding selections primarily based on my writings. There is no such thing as a one-size-fits-all answer in investments. What could also be funding for sure traders might NOT be good for others. And vice versa. Subsequently, learn and perceive the product phrases and circumstances and contemplate your threat profile, necessities, and suitability earlier than investing in any funding product or following an funding strategy.