LTGC Tax changes and implications

From the perspective of ReSale of property:

LTGC Tax changes and implications

In a significant policy shift, the government has revised the tax structure for long-term capital gains (LTCG) on non-financial assets, including real estate. The changes include the removal of the indexation benefit for calculating LTCG and a reduction in the tax rate from 20% to 12.5%. These measures aim to streamline the capital gains tax regime across both financial and non-financial assets.

However, the short-term capital gains (STCG) tax rate remains unchanged at 20%.

Importantly, the government has clarified that properties acquired before 2001 will retain their indexation benefits, ensuring that the new rules only apply to more recent purchases. The updated regulations are effective from July 23, 2024, meaning transactions completed before this date are not subject to the new rules.

Impact on Real Estate Resale of property:

For instance, if you bought a property 10 years ago for Rs. 1 crore and sold it today for Rs. 1.9672 crore (assuming a 7% compound annual growth rate), your capital gain would be approximately Rs. 45.72 lakhs. Under the old system, with indexation, you'd pay around Rs. 9.14 lakhs in tax. Without indexation, the gain is Rs 96.72 lakhs, resulting in a tax of about Rs. 12.09 lakhs, a 32% increase.

Extending this to a 20-year period at the same 7% growth rate, the capital gains tax would be?Rs. 13.19 lakhs under the old regime and Rs. 35.87 lakhs under the new rules, a staggering 172% increase.?

If the holding period is more than 10 years and the CAGR is of healthy 10%, then the new regime will have meager tax savings in a few cases.

Options to Mitigate LTCG Tax

To mitigate the impact of these changes, taxpayers have two primary options:

1. Invest in Government Bonds: You can invest the capital gains of up to Rs 50 lakhs in government bonds. If your capital gain is Rs 60 lakhs, you would still pay tax on the remaining Rs 10 lakhs that cannot be invested in bonds.
2. Reinvest in Property: Alternatively, you can use the capital gains to purchase another property. However, without the indexation benefit, the capital gain amount is higher, necessitating a higher investment to offset the tax liability.

These changes represent a substantial shift in the capital gains landscape, prompting taxpayers to reconsider their investment and tax planning strategies.

Conclusion:

• Negative Sentiment for Investors will lead to less demand and moderate price growth.
• Higher amount of LTCG tax to be paid
• Less tax saving as calculated LTCG gain is much higher so it will max out the?reinvestment amount in capital gain bond tax savings potential.
• Encourages Black money

We believe markets like Bangalore, Hyderabad?and Chennai which are end-user driven markets, will be the least impacted. Markets like Noida, Gurgaon and Mumbai, which have higher investor activity, are likely to be more impacted