LTCG Tax Reliefs for Homeowners
Residential

Top LTCG Tax Reliefs for Homeowners: What You Need to Know

November 7, 2024
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There are a lot of expenses when it comes to owning a property; from the first token payment to the subsequent ones that the owners make to convert it into their home. However, there is one expense, a tax that not many talk about; the Long-Term Capital Gains Tax. (LTCG Tax)

This tax applies to the profit from selling a capital asset, like property, that has been held for over two years. Many have paid for this tax, and in the February 2024 budget, Finance Minister Nirmala Sitharaman reduced the LTCG tax to 12.5% and removed the indexation benefit. The latter decision meant that homeowners couldn’t adjust their property’s price to account for inflation, leading to a higher tax bill, since the profit would also be bigger.

However, in the July 2024 budget, the finance minister introduced tax relief measures to the previous regime, giving homeowners the chance to choose if they want the indexation benefit or not. These measures are significant, as they reduce the tax burden, thereby sparking considerable interest among those who would like to benefit from these measures.

Leading luxury real estate developers, such as L&T Realty, which is coming up with new projects around the country, are paying more attention to these updates and changes as they could influence the demand for houses and impact new home-buying trends.

Understanding LTCG Tax:

The Long-Term Capital Gains Tax, or the LTCG, is charged on the profit gained from selling a property that has been held for a long duration, typically over 24 months.

It is significantly different from Short-Term Capital Gains Tax, which is levied on assets sold within a shorter period, (typically two years or less) and at a higher rate with no indexation benefits.

The LTCG Tax, whose rate is typically 20%, benefits from indexation and reduces taxable gains. Since it is levied on properties that have been held for a long amount of time, it encourages more people to make longer investments in the real estate market.

However, let’s take another scenario, where a homeowner has a property that they inherited from a family member. In this case, the holding period of the previous owner is also considered. If the combined holding period is more than 24 months, then the LTCG Tax applies to it.

In the case of NRIs selling properties that they hold in India, the LTCG tax is again only levied if they have held it for more than 2 years, and could also be subject to a TDS (Tax Deducted at Source) on the sale’s proceeds.

There are only two cases under which there are LTCG Tax exemptions

  • Section 54: If the homeowner invests the capital gains from the property’s sale in another residential property within a specified period.
  • Section 54EC: If the capital gains are invested in specified bonds, such as REC or NHAI bonds.

Recent Changes in LTCG Taxation:

In the July 2024 budget, the government proposed an amendment to the LTCG Scheme from the previous budget. This came after backlash from both, the real estate market as well as the homeowners.

According to the Amendment, homeowners have two choices:

  1. The 12.5% LTCG Tax without indexation benefits, or
  2. The existing 20% tax with indexation benefits.

This allows the taxpayers to calculate their taxes under both regimes and pay whichever is lower. However, this relief comes with a condition: Only homeowners who bought property before July 23, 2024, will have this choice. Any property bought after this date will have to follow the new regime: 12.5% tax rate with no indexation benefits.

With two choices, how can homeowners decide which one will be beneficial for them?

The answer to that question depends on the property as well as their financial condition. For example, if the property in question is ancestral, and owned by one person or their family member for many years, the owner can go for the second option, so they can adjust their property’s price to account for inflation, and pay a lower and better tax amount.

On the other hand, if the property is only two years old, then the owner can choose the new regime, and pay the LTCG at a 12.5% rate, leading to a better tax amount.

Thus, this flexibility allows owners to manage their real estate investments and maximise returns.

Impact on Homeowners

The changes brought about by these amendments can lead to significant financial benefits. Homeowners can save on taxes as they can choose the option that suits their financial situation the best.

It can also make properties more affordable and encourage more transactions. With developers like L&T Realty bringing projects in locations such as Powai, Mahim, and Ghatkopar in Mumbai, and Hebbal in Bengaluru, they might see increased demand for their homes, since the tax relief makes owning homes more accessible and appealing.

Let’s take examples where both choices have been applied: [a]

  1. Property bought in May 2003 for INR 30 lakhs.

Property sold in May 2024 for INR 1.5 Crore.

The Cost Inflation Index was 109 in FY 2003-24, and 363 in 2024-25,

The index purchase price would be 30 x 363/109 = INR 99.91 lakhs.

Capital Gains: 1.5 crore, or 150 lakhs – 99/.91 Lakhs = INR 50.09 lakhs.

Tax payable: 20% of 50.09 = INR 10.02 lakhs.

  1. Sale of property under the new regime:

Property bought in May 2003 for INR 30 lakhs.

Property sold in May 2024 for INR 1.5 Crore.

Capital gains: 1.5 cr or 150 lakhs – 30 lakhs = 120 lakhs

Tax payable: 12.5% of 120 lakhs = 15 lakhs

Comparatively, the payable tax in these is significantly different; the tax savings between both is 4.98 lakhs.[b][c][d][e][f][g][h]

Property Market Implications:

The new LTCG Tax reliefs could lead to higher property prices; reduced tax liabilities can make real estate more attractive.

  • Increased liquidity and transactions: The new regime of 12.5% rates with no indexation can encourage homeowners to sell their properties, especially if they have appreciated substantially. This can lead to an increase in the properties available in the market, thus stabilising or reducing property prices in some areas due to higher supply.
  • Attractiveness for investors: With lower tax burdens, real estate becomes more attractive as an investment option compared to other assets. Investors interested in long-term capital appreciation might see this as an opportunity to enter the market or expand their portfolios.

The tax structure could also influence buying and selling patterns:

  • Selling incentive: Homeowners who have held properties for a long time and witnessed significant appreciation might be more inclined to sell under the new tax regime, especially if the 12.5% option results in a lower tax liability.
  • Buying decisions: Potential buyers too could see this as an opportunity to buy properties with an expectation of a favourable tax treatment when they sell it later.

L&T Realty’s upcoming projects can also benefit from these new reliefs. These new residential projects are located in areas with great amenities and connectivity, such as Mahim, Powai, Ghatkopar and Parel in Mumbai, and Hebbal in Bengaluru, and could see the following benefits:

  • Increased interest in investment: Investors who are interested in capitalising on tax-efficient opportunities could be more inclined to invest in L&T Realty’s projects.
  • Boost in sales: The potential tax savings could drive more buyers to commit to L&T Realty’s projects, thus leading to faster sales cycles. Buyers might also be motivated to make the purchase sooner to secure the properties that they believe might appreciate significantly.

Expert Opinions

According to Real Estate experts, the new regime of a 12.5% LTCG tax rate with no indexation benefits could be more beneficial to properties whose value is more than the price post-inflation. However, there is no denying that indexation is beneficial.

Experts believe that the indexation benefits can be advantageous, especially for properties where the appreciation is closer to the inflation rate.

The amendment, which gives the property owners the choice and flexibility to manage their tax payments is expected to stimulate investment and sales in the real estate market, especially for residential properties, and reduce the tax burden on sellers.

Conclusion

The new LTCG tax relief measures are essential, especially for those homeowners who are looking to save money on their property sales. These changes make homeownership more affordable.

Exploring L&T Realty’s latest offerings makes for a smart investment; not only are their upcoming projects located in prime locations, but L&T Realty is a reliable source to answer all your queries regarding tax benefits. Their impeccable work quality also means that buying a property will be the best choice you will make!

Always stay updated on tax laws regarding property, and consult with professionals before making informed decisions.