Taxation of gains on sale of land/ building – What has changed post Budget 2024?

With effect from 23 July 2024, certain provisions relating to computation and taxation of capital gains in the Income?tax Act were amended through Finance (No. 2) Act, 2024. In this article, we will understand how these amendments affect taxation of gains on sale of land or building.

Broad scheme: Subject to an exception for certain agricultural land in India, any land or building held by a person qualifies as his capital asset, and accordingly gains on its transfer results in taxable capital gains for such person. Cost of acquiring and improving such asset and the expenditure in connection with the transfer are deducted from the sale consideration to arrive at the gains. If such asset is held for more than 24 months by the owner before its transfer, the gains are treated as long-term capital gains (LTCG). There is no change up to this stage even in the amended provisions.

As per the provisions prevailing immediately before the amendments i.e. up to 22 July 2024, while computing LTCG, indexed cost of acquisition and indexed cost of improvement was deductible instead of the actual cost of acquisition and the actual cost of improvement. And such LTCG, as computed after indexation benefit, was taxed at the rate of 20%.

For example, say Ms. Tanvi acquired a residential house in August 2018 for INR 3.15 crore and sold the same in June 2024 for INR 4.49 crore. Considering Indexed cost of INR 4.08 Crore (computed based on cost inflation index table), she will earn LTCG of INR 41 Lakhs (i.e. 4.49 crore less 4.08 crore), on which tax of INR 8.20 Lakhs (i.e. 20% of 41 Lakhs) will be payable, assuming she does not reinvest the gains to avail exemption from the capital gains tax. If Ms. Tanvi purchases/ constructs one residential house in India costing INR 41 Lakhs or more or if she invests INR 41 Lakhs in specified bonds, subject to fulfilment of other conditions attached with such rollover investments, the entire capital gains of INR 41 Lakhs shall not be chargeable to tax (i.e. full rollover investment exemption).?

The change: As per the changes initially proposed in the Budget 2024, the LTCG on transfer occurring on or after 23 July 2024 was to be computed without the indexation benefit, and such LTCG was to be taxed at the rate of 12.5% instead of 20%. These provisions, when later enacted, were relaxed for resident individuals and resident Hindu Undivided Family (HUFs).

Let’s understand, what has not changed, what relaxation were given for resident individuals and resident HUFs, and how the changes affect other categories of persons in absence of similar relaxation for them.? ???

What has not changed: The very first point to note is that the provisions for taxation of LTCG on transfer occurring before 23 July 2024 remains unchanged for all persons, whether a resident individual/ HUF or otherwise. Thus, in the example of Ms. Tanvi, the tax liability of 8.20 Lakhs without any rollover investments or the NIL tax liability consequent to rollover investments, will not change, given that the residential house was sold in June 2024 i.e. before 23 July 2024.

Impact of change for persons other than resident individual/ HUF – without rollover investments: Continuing the example of Ms. Tanvi, Let’s say, she becomes a non-resident for FY 2024-25 and sells the residential house in August 2024. Since, the transfer occurs after 22 July 2024, as per the amended provisions, the LTCG shall be computed without indexation benefit, and such LTCG shall be taxed at the rate of 12.5%. Thus, Ms. Tanvi would earn LTCG of INR 1.34 crore (i.e. sale consideration of INR 4.49 crore less cost of INR 3.15 crore), on which tax of INR 16.75 Lakhs (i.e. 12.5% of 1.34 crore) shall be payable. Accordingly, the amendments shall result in an excess tax liability of INR 8.55 Lakhs (i.e. 16.75 Lakhs less 8.20 Lakhs) for Ms. Tanvi, where she does not make any rollover investments. Thus, in cases similar to that of Ms. Tanvi, removal of indexation benefit shall result in higher tax liability despite the reduction in tax rate from 20% to 12.5%, especially in those transactions of sale of land or building where the sale price has appreciated sharply as compared to the purchase cost.

The relaxation for resident Individuals/ HUFs: While the initial proposal of computing LTCG without indexation benefit for transfer occurring on or after 23 July 2024 is enacted without any modification, a relaxation while computing tax on LTCG is provided for resident individuals/ HUFs, in relation to transfer of land/ building which is acquired before 23 July 2024. As per this relaxation, where the tax calculated @ 12.5% on LTCG computed without indexation benefit exceeds the tax computed as per the provisions prevailing before 23 July 2024 (i.e. LTCG computed with indexation benefit and taxed @ 20%), such excess tax liability is to be ignored.

It may, however, be noted that the relaxation is neither available for a non-resident individual/HUF nor in relation to LTCG on transfer of any other asset other than ‘land or building or both’ and nor in relation to any ‘land or building or both’ which is acquired on or after 23 July 2024.

Going back to the example of Ms. Tanvi who is a resident during FY 2024-25, the excess tax liability of INR 8.55 Lakhs is to be ignored as per the relaxation, and accordingly, Ms. Tanvi shall be effectively liable to pay tax of only INR 8.20 Lakhs, where she does not make any rollover investments.

The relaxation for resident individuals/ HUFs with rollover investment: ??

The relaxation provides for ignoring the excess tax liability. But the amended provision for computing LTCG no more allows indexation benefit for transfer occurring on or after 23 July 2024. For full rollover investment exemption, the investment should be at least equal to the LTCG. Does this mean that the rollover investment should be at least equal to the LTCG computed without indexation benefit, to avail full rollover investment exemption? In other words, in the example of Ms. Tanvi who is a resident during FY 2024-25, for full rollover investment exemption, is she required to make investment of INR 1.34 crore viz. the amount of LTCG computed without indexation benefit?

The answer to the questions in the earlier paragraph is in the negative. According to the relaxation, the tax calculated at 12.5% on the LTCG computed without indexation benefit is to be compared with the tax computed in accordance with the provisions that prevailed before 23 July 2024. Before 23 July 2024, LTCG was to be computed with indexation benefit. Hence, such LTCG computed with indexation benefit is to be considered for rollover investment. Thus, to avail full rollover investment exemption, Ms. Tanvi needs to only invest INR 41 Lakhs and not INR 1.34 crore.

Impact of change for persons other than resident individual/ HUF – with rollover investments:

Having explained that the amended provision for computing LTCG no more allows indexation benefit for transfer occurring on or after 23 July 2024 and given that the relaxation is available only to resident individuals/ HUFs, under the amended provisions, the persons other than resident individual/ HUFs need to invest a higher amount for availing full rollover investment exemption.

Continuing with the example of Ms. Tanvi, if she becomes non-resident during FY 2024-25 and sells her residential house in August 2024, her LTCG without indexation benefit shall work out to INR 1.34 crore, on which tax payable shall be INR 16.5 Lakhs. Consequently, if she decides to claim full rollover investment exemption, she needs to make rollover investments of at least INR 1.34 crore. Had she been a resident during FY 2024-25, investment of INR 41 Lakhs should have been sufficient for full rollover investment exemption. This needs to be kept in mind by the non-resident individuals who sell their land or building on or after 23 July 2024 and intend to avail LTCG exemption by making rollover investments.

Consult a tax advisor for guidance: To sum up, while the impact of the amendments in relation to taxation of gains on sale of land or building is explained in detail, one must consult his/her tax advisor before entering any sale/ purchase transaction of land or building, to get necessary guidance in relation to specific facts of his/ her case.

Written by CA Keyur Rambhia (September 2024)