New LTCG rule on property to hit homeowners hard: Below 9% annual property price growth, common in many cities, could mean higher loss now The Ministry claimed the majority of homeowners would benefit, but an analysis showed that those with slow or stagnant property growth will end up paying higher taxes now. Most major cities experienced below 9% property price growth over the past five years, burdening these homeowners further
Budget 2024 has taken away the indexation benefit on property. Now, homeowners are required to pay a flat 12.5% long-term capital gain tax on the gain they make by selling the property. The new rule is one of the most significant budget proposals, especially for homeowners planning to sell their property. While the finance ministry claims that a majority of homeowners will be better off under the new rule, ET Wealth’s analysis paints a different picture and shows that some homeowners will even face a double blow. Here is a detailed analysis and also suggestions on how you can minimise the adverse impact.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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Homeowners with stagnant price or lower price growth are the biggest sufferer
While the new rule has removed the use of indexation, it has brought down the tax rate from 20% to 12.5%. This has created a confusion as to who are likely to benefit from this rule and who are likely to be the losers.
Any property purchased before April 1, 2001, enjoys grandfathering provision under which its fair market value on this date is taken as the acquisition cost of the property. If the property was purchased after March 31, 2001, the actual acquisition cost is used to calculate the capital gains.
To understand the impact of this new rule, we analysed the impact of the new rule across various periods from 2004 to 2019. We found that this rule hits hard people who have already been a victim of the property market’s vagaries due to stagnant or lower growth in property prices. However, if the compound annual growth in the value of your property has been substantially above inflation, then you may end up saving more tax under the new LTCG rule of 12.5% without indexation.
Cut-off of 9% annual growth in property price decides who wins and who loses
No matter the purchase date of your property, if the annual growth of the property’s price is below 9%, there is a high probability that the new rule will push you towards the losing side. However, if your property price has grown annually by 10% or above, the new rule might end up giving you better benefits.
For instance, if you had bought a property worth Rs 15 lakh in 2009 and its value grew annually at 4%, then you could have sold this property for Rs 27 lakh now. According to the earlier indexation rule, the inflated cost of your property would be Rs 36.79 lakh. As the inflated cost is higher than the selling price, there would be no capital gains. So you would not have to pay any tax on it. However, according to the new rule, you would not be allowed to inflate the cost and your gain would be around Rs 12 lakh. So you would need to pay a capital gain tax of Rs 1.5 lakh.
When property grows 4% annually - Indexed cost higher than sale value but you still pay tax
Year of Purchase
2004
2009
2014
2019
Cost of purchase
Rs 5 lakh
Rs 15 lakh
Rs 25 lakh
Rs 50 lakh
Cost inflation index in purchase year
113
148
240
289
Current sale price @ 4% CAGR
Rs 10.96 lakh
Rs 27.01 lakh
Rs 37 lakh
Rs 60.83 lakh
Cost inflation index of 2024-25
363
363
363
363
Indexed cost today
Rs 16.06 lakh
Rs 36.79 lakh
Rs 37.81 lakh
Rs 62.80 lakh
Capital gains on indexed cost
-Rs 5.10 lakh
- Rs 9.78 lakh
-Rs 80,639
- Rs 1.97 lakh
20% tax with indexation (Old)
0
0
0
0
Capital gains without indexation
Rs 5.96 lakh
Rs 12.01 lakh
Rs 12 lakh
Rs 10.83 lakh
12.5% tax without indexation (New)
Rs 74,445
Rs 1.50 lakh
Rs 1.50 lakh
Rs 1.35 lakh
Tax saving in the new rule
-Rs 74,445
-Rs 1.50 lakh
-Rs 1.50 lakh
-Rs 1.35 lakh
When property grows 8% annually - Indexed cost still higher than sale price but you pay higher tax now
Year of Purchase
2004
2009
2014
2019
Cost of purchase
Rs 5 lakh
Rs 15 lakh
Rs 25 lakh
Rs 50 lakh
Current sale price @8% CAGR
Rs 23.30 lakh
Rs 47.58 lakh
Rs 53.97 lakh
Rs 73.47 lakh
Indexed cost today
Rs 16.06 lakh
Rs 36.79 lakh
Rs 37.81 lakh
Rs 62.80 lakh
Capital gains on indexed cost
Rs 7.24 lakh
Rs 10.79 lakh
Rs 16.16 lakh
Rs 10.67 lakh
20% tax with indexation (Old)
Rs 1.45 alkh
Rs 2.16 lakh
Rs 3.23 lakh
Rs 2.13 lakh
Capital gains without indexation
Rs 18.30 lakh
Rs 32.58 lakh
Rs 28.97 lakh
Rs 23.47 lakh
12.5% tax without indexation (New)
Rs 2.29 lakh
Rs 4.07 lakh
Rs 3.62 lakh
Rs 2.93 lakh
Tax saving in the new rule
- Rs 83,953
-Rs 1.91 lakh
-Rs 38,951
-Rs 80,057
Property grows 12% annually - Indexed cost lower than sale price, new rule saves tax for you
Year of Purchase
2004
2009
2014
2019
Cost of purchase
Rs 5 lakh
Rs 15 lakh
Rs 25 lakh
Rs 50 lakh
Current sale price @12% CAGR
Rs 48.23 lakh
Rs 82.10 lakh
Rs 77.65 lakh
Rs 88.12 lakh
Indexed cost today
Rs 16.06 lakh
Rs 36.79 lakh
Rs 37.81 lakh
Rs 62.80 lakh
Capital gains on indexed cost
Rs 32.17 lakh
Rs 45.31 lakh
Rs 39.83 lakh
Rs 25.31 lakh
20% tax with indexation (Old)
Rs 6.43 lakh
Rs 9.06 lakh
Rs 7.97 lakh
Rs 5.06 lakh
Capital gains without indexation
Rs 43.23 lakh
Rs 67.10 lakh
Rs 52.64 lakh
Rs 38.12 lakh
12.5% tax without indexation (New)
Rs 5.40 lakh
Rs 8.39 lakh
Rs 6.58 lakh
Rs 4.76 lakh
Tax saving in the new rule
Rs 1.03 lakh
Rs 67,465
Rs 1.39 lakh
Rs 29,823
If you had bought a property worth Rs 25 lakh in 2014 and its value grew annually at 8%, you can sell this property for around Rs 54 lakh now. According to the earlier indexation rule, the inflated cost of your property would be around Rs 38 lakh. This means you would have a capital gain of around Rs 16 lakh and would have to pay a long-term capital gain tax of around Rs 3.23 lakh. However, according to the new rule, your gain would come around Rs 29 lakh and so you would need to pay the capital gain tax on Rs 3.62 lakh — which is Rs 38,951 more than the tax in the old rule. So despite an 8% annual growth in property prices, you would end up losing more money as tax under the new rule.
"On an average, the Cost Inflation Index has risen by 4.6% annually. In such a situation, the old taxation scheme would have resulted in very low capital gain or even a loss, given that the indexed value would replace the cost of acquisition. However, in the proposed law, there may be a tax liability as now the cost of acquisition shall be the cost actually incurred," says Sneha Pai, Senior Director, Direct Tax, Nexdigm
Most prominent cities have registered a property price growth below 10% in last 5 year
Some of the most impacted homebuyers in India will be the ones who purchased a property 5 years ago. This is because most of the cities, except Hyderabad, have seen an annual property price growth of below 9%. So most of these homebuyers in the prominent cities will be paying more taxes under the new rule.
"While MMR and Chennai have seen less than 5% CAGR in average housing prices over the last 5 years (FY19-FY24), rest of the major cities have witnessed about 5-10% CAGR during the same period," says Vimal Nadar, Senior Director & Head, Research, Colliers India.
Many cities have average annual property price growth of 9% or below
City
Housing prices in Q1 2024 (INR/sq ft)
5-year CAGR(FY19-FY24)
Ahmedabad
7,176
6%
Bengaluru
10,377
7%
Chennai
7,710
2%
Hyderabad
11,323
10%
Kolkata
7,727
5%
Mumbai Metropolitan Region
20,361
1%
National Capital Region
9,757
9%
Pune
9,448
5%
Pan-India Avg
10,485
5%
Note: Prices are based on carpet area
Source: Liases Foras, Colliers
Double blow to people who paid interest on home loan
Most homebuyers who had taken a loan to make the purchase will have to bear another loss on account of interest payment — apart from the lower returns on property. For instance, if you took a Rs 20 lakh home loan in 2014 with a 20-year repayment tenure and an interest rate of 9%, you would have already paid an interest of Rs 15.80 lakh in the past 10 years.
You can still save this tax by reinvesting your gains but with a higher amount
There is still an option to save this long-term capital gain tax. But for that, you will need to reinvest a higher amount than earlier. “An additional point to be noted is that the amount of taxable capital gain will now increase in the absence of indexation benefit. Capital gains are exempt if the gains are reinvested in specified assets within specified timelines. To avail the exemption now, a larger sum will need to be reinvested,” says Pai.
In case of a loss, you don’t need to pay any tax and can set it off against other capital gains
If you have suffered a loss with the purchase of your property, you do not need to pay any tax. "In case of overall loss, there would not be any tax liability. Additionally, loss in a particular asset is allowed to be set off against overall gains in a particular assessment year. In cases where the entire long-term capital loss cannot be set off against the gain, it is carried forward to the next year," says Nadar.
Costs are allowed to be added in acquisition cost for reducing capital gain
According to Pai, the costs associated with the purchase of the asset that are considered as part of the acquisition cost are:●Cost of purchase of the asset
●Related expenses like stamp duty, brokerage
●Interest on home loans availed, if same has not been claimed as a deduction while computing income from house property or under any other head of income
●Additional capital expenditure incurred for improvement of an asset, like capital renovation expenses
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This story originally appeared on: India Times - Author:Faqs of Insurances
