Here is how LTCG will be calculated if your property appreciates by 5%, 7.5%, 10% and 12.5% over 2-20 years

Finance Minister Nirmala Sitharaman announced to eliminate the indexation benefits on non-financial assets (including real estate) in her budget speech on Tuesday, along with slashing the long term capital gain (LTCG) tax rate to 12.5 per cent from 20 per cent earlier. The latest announcement from the union minister has sparked controversies and questions among the layman, who are calculating which tax regime suits their real estate investments.
 

Explaining the rationale behind the move, the government said that the step is being taken to rationalise the capital gains tax across all assets and the move comes into effect on an immediate basis, that is from July 23, 2024. It also clarified that the removal of indexation benefits will not be applicable to old properties held before 2001, which would continue to get indexation benefits.
 

The move will impact investors who would sell their house (investment) and reinvest in other asset classes. It will also impact relatively shorter-term investments (less than 5 years) where market price growth is yearly above 10 per cent, said the global brokerage firm CLSA.
 

Conversely, the impact of this new regime would be neutral/marginally beneficial for investments with longer holding period (more than 10 years) and where property price appreciation is at less than 10 per cent per year, it said. The global brokerage has explained various cases involving property appreiciation for a period of 2 to 20 years and net tax outgo for the investors.
 

"We believe markets like Bangalore, Hyderabad and Pune, which are end-user driven markets, will be the least impacted. Markets like NCR and Mumbai, which have higher investor activity, are likely to be adversely impacted. Further, there will be no impact for super-luxury apartments with ticket size of Rs 10 crore since in last year’s budget they had capped the indexed cost of acquisition at Rs 10 crore," CLSA said.

 

Explaining it with a base case purchase of 100 in both the tax regimes, CLSA shows that that taxpayer will pay 1,000 per cent more tax in the new tax regime if the housing prices increase at 5 per cent CAGR for two years, compared to that one with indexation. Similarly, they will pay 754 per cent higher tax for holding a property for 5 years and 238 per cent more for 10 years.
 

If the property appreciation is at 7.5 per cent CAGR, then the net outgo will be 65 per cent higher for two years, 52 per cent higher 5 years, 21 per cent higher on 10 year and 96 per cent higher on 20 year holding period. Similarly, if the property rates rise at 10 per cent CAGR, the net outgo will be 16 per cent higher for 2 years and 8 per cent higher for 5 year holding. On the contrary, it will be 8 per cent less for holding property for a 10 year period, but 2 per cent higher for a 20 year holding period.
 

Interestingly, if the property rates appreciate at 12.5 per cent CAGR annually, then a taxpayer will be able to save 2 per cent on a holding period of 2 years, 8 per cent on a holding period of 5 years, 19 per cent on a holding period of 10 years and 20 year under the new tax regime.
 

Preeti Sharma, Partner, Global Employer Services, Tax & Regulatory Services, BDO India has explained a scenario, where a property is being sold in FY25 for Rs 1.2 crore. The property was acquired in FY11 for Rs 40 lakh. The net tax outgo in the old regime comes to around Rs 6,61,078, while in the net tax regime it is calculated to be Rs 10,00,000. Thus, with no indexation benefit, the tax liability is Rs 3,38,992 more on the tax-payer, which is about 51 per cent higher than the previous regime.

 

The long-term capital gain tax rate has been reduced but indexation benefits wherein the cost of acquisition is allowed to be adjusted with cost of inflation index will not be available. This change will substantially increase the amount of capital gain and many tax-payers will have to pay heavy tax liability on sale of property, said Preeti Sharma from BDO India.
 

"However, those who are planning to re-invest in other property need not worry as the exemption under section 54 for re-investment in a new house will continue to remain available, subject to satisfaction of prescribed conditions. This change will be applicable on all sale transactions done from July 23, 2024 onwards. If one has sold your property prior to this date, one will be governed under old provisions only,” she said
 

Echoing the similar views, Kotak Institutional Equities said that the impact on end-user decision making to buy new homes would be negligible since the home is purchased for personal consumption. For investors, the impact of the tax change would be case-specific and dependent on the price appreciation of the underlying property relative to the index and the holding period.
 

"Assets that would have seen a higher price appreciation (relative to the appreciation of the index used for such indexation benefit calculation historically) would be better off under the new regime, while assets that would have seen a lower/no price appreciation would be worse off under the new regime," Kotak added. "Negligible impact on end-users (75-80 per cent of demand), with some impact on investor returns, although the impact on overall housing demand should be limited."

 

 

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