No Indexation Profit if property offered at a loss

The Authorities took away the indexation profit for properties in Price range 2024.

After receiving suggestions, the Authorities relented and gave again the indexation profit to properties purchased earlier than July 23, 2024.

Now, you’d assume that, for the properties purchased earlier than July 23, 2024, there isn’t any change in capital features taxation. All the pieces is again to regular.

That’s the understanding most of us have, isn’t it?

Nevertheless, that’s not solely right in case your property funding has made solely gentle features and even suffered losses.

When a property funding does NOT carry out effectively, you get aid in 2 methods.

1. Chances are you’ll not should pay a lot (or any) capital features tax on the sale of such an funding. No capital acquire, no capital features tax.
2. Extra importantly, when you e-book a capital loss, you may make the most of this loss to set off capital features from sale of different capital belongings in the identical 12 months or within the coming 12 months. This could cut back your tax legal responsibility in the identical 12 months or within the coming years. And indexation performs an enormous function in lowering taxable capital features OR growing capital losses.

Whereas the Authorities has doled out the carrot of relenting on the indexation profit for the properties purchased earlier than July 23, 2024, it has well taken away the profit as laid out in (2).

Therefore, in case your property funding was purchased earlier than July 23, 2024 or has underperformed, you’d get indexation profit ONLY to REDUCE your Capital GAINS, however NOT to INCREASE your Capital LOSSES.  Fairly a bit hit in my view.

Furthermore, in case you are an NRI, you haven’t even been supplied this aid. This aid is obtainable solely to Resident People.

Let’s talk about all this and extra with examples on this submit.

The Backdrop

Earlier than Price range 2024 bulletins, any long-term capital features (holding interval > 2 years) on sale of property have been taxed at 20% (after indexation).

Earlier than Price range 2024 (20% With Indexation)

Lengthy Time period Capital Acquire/Loss = Sale worth – Listed price of buy/enchancment

Tax at 20% on such calculated LTCG.

Price range 2024 took the advantage of indexation away from actual property transactions.

After Price range 2024 (12.5% With out Indexation)

Lengthy Time period Capital Good points/Loss = Sale worth – Price of buy/enchancment

Tax at 12.5% on such calculated LTCG.

The Leisure for Property Transactions however with Caveats

After receiving suggestions from numerous stakeholders, the Authorities reinstated the indexation profit for properties purchased earlier than July 23, 2024, however with caveats.

Let’s contemplate an instance.

You promote a property purchased earlier than July 23, 2024, after holding it for two years.

Because the holding interval is larger than 2 years, the ensuing features might be thought of long-term capital features.

Calculate the next two quantities.

1. LTCG1 = Sale worth – Price Worth. TaxLiability1 = 12.5% * LTCG1
2. LTCG2 = Sale worth – Listed Price of Buy. TaxLiability2 = 20% * LTCG2

Your tax legal responsibility would be the decrease of the 2 calculated tax liabilities.

Your last tax legal responsibility = Decrease (TaxLiability1, TaxLiability2)

This appears to counsel that the Authorities has stored issues unchanged for the properties purchased earlier than July 23, 2024.

Sadly, issues are usually not the identical. We may even perceive this with the assistance of illustrations later within the submit.

Earlier than we delve upon the issue with rest (or somewhat how that is worded), let’s first see how the Authorities has effected these modifications (Price range 2024 and the next rest).

Which Sections of Earnings Tax specify Capital Good points Taxation?

Part 2(42A): specifies the holding interval for long run capital features.

Part 48: specifies the best way to calculate long-term capital features.

Quick-term capital features are added to your revenue and taxed at respective slab charge. Part 111A makes an exception for shares and fairness mutual funds.

Part 112: specifies the tax charges for long run capital features. Part 112A makes an exception for shares and fairness funds.

Within the Price range 2024, the indexation profit was withdrawn by means of modification to Part 48. The tax charges on LTCG have been modified by means of modification to Part 112. Whereas enjoyable the indexation profit, the Authorities has not made any modifications to Part 48, however solely Part 112.

How has the Authorities introduced this alteration (rest)?

The Authorities has introduced this rest by amending Part 112 (and never Part 48).

Basically, the Authorities has NOT modified the methodology of calculating the capital acquire/loss for properties purchased earlier than July 23, 2024. The capital features calculation stays the identical (as modified by means of Price range 2024).

Lengthy Time period Capital Acquire = Sale Worth – Price of Property (Laid out in Part 48). Discover there’s nonetheless no indexation profit.

The Authorities has solely modified the way in which the tax is calculated. Beneath Part 112.

On the time of calculation of tax legal responsibility, it says calculate tax legal responsibility underneath each strategies. 12.5% with out indexation. And 20% with indexation. And pay the decrease tax legal responsibility. (Laid out in Part 112).

Copying an excerpt from the Finance Act (2), 2024

This presents a singular problem.

You may be detached in case your actual property funding has paid off effectively. Nevertheless, you’ve got an issue in case your actual property funding has made solely gentle features or losses.

What if there isn’t any acquire? What if there’s a loss?

Even within the case of capital loss, there are 2 prospects.

1. You got for Rs 30 lacs and offered for Rs 28 lacs. That may be a clear nominal loss.
2. You got for Rs 30 lacs and offered for Rs 35 lacs. No nominal loss. However the listed price of buy is Rs 45 lacs.

The comfort supplied to actual property traders by means of modification to Finance Invoice, 2024 will be sure that you don’t pay greater taxes (than you’d have if indexation have been allowed).

Nevertheless, this doesn’t give you aid on capital losses (carry ahead loss). With indexation profit, you’d have booked a a lot greater capital loss. A better capital loss/carry ahead loss can be utilized to cut back capital features tax legal responsibility in the identical 12 months or within the coming years.

Briefly, you don’t pay extra tax, however there’s a chance that you simply e-book a decrease capital loss (or carry ahead decrease loss) after Price range 2024 modifications regardless of the comfort.

Let’s perceive this with the assistance of some illustrations.

Illustrations: For Capital features tax calculation

We contemplate 4 eventualities.

1. Good Revenue (Price: Rs 30 lacs, Sale Worth: Rs 60 lacs)
2. Gentle Revenue (Price: Rs 30 lacs, Sale Worth: Rs 35 lacs)
3. Gentle Loss (Price: Rs 30 lacs, Sale Worth: Rs 28 lacs)
4. Heavy Loss (Price: Rs 30 lacs, Sale Worth: Rs 20 lacs)

Deal with the ultimate tax paid and the capital loss/carry ahead loss.

No issues within the above instance.

Capital Good points Tax Legal responsibility is similar (as anticipated).

However, underneath the previous methodology, you’d have booked lack of Rs 10.37 lacs. You might have used this loss to set off capital features from sale of, say, shares and prevented paying capital features tax of 10.37 lacs * 12.5% = ~1.30 lacs.

However with the removing of indexation profit (New Methodology), you don’t get to e-book this capital loss. That’s a detrimental for you.

CG Tax is similar, however discover the distinction between the capital loss booked.

Tax legal responsibility is similar, however the capital loss is far greater underneath the previous methodology (with indexation).

As you may see, the ultimate tax to be paid (or to not be paid) is similar underneath each previous and new methodology. However the capital loss/carry ahead loss is completely different.

This occurred as a result of the Authorities didn’t change the calculation of capital features underneath Part 48. It solely supplied rest on the taxes by permitting traders to pay a decrease tax underneath Part 112.

Because the capital features/loss calculation doesn’t embody indexation anymore, the capital loss (if any) goes down drastically.

Non-residents (NRIs) have been short-changed

We noticed earlier within the submit the indexation profit is offered on sale of properties purchased earlier than July 23, 2024, however there have been caveats.

If you’re an NRI, there’s extra unhealthy information.

1. The indexation profit shall NOT be out there to Non-residents (NRIs), even for properties purchased earlier than July 23, 2024.
2. The selection of paying taxes at 12.5% (with out indexation) or 20% (with indexation) for properties purchased earlier than July 23, 2024 is offered solely to resident people and HUFs.
3. So, in case you are an NRI and have offered a property on or after July 23, 2024, you do NOT get indexation profit. Being an NRI, you pay tax on LTCG at 12.5%.

All of the illustrations proven earlier within the submit are just for resident people.

For NRIs, there isn’t any alternative between 12.5% with out indexation or 20% after indexation.

Disclaimer: I’m not a tax skilled and there could also be gaps in my understanding. Please seek the advice of a chartered accountant earlier than appearing on the contents of this submit.

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This submit is for schooling objective alone and is NOT funding recommendation. This isn’t a suggestion to take a position or NOT spend money on any product. The securities, devices, or indices quoted are for illustration solely and are usually not recommendatory. My views could also be biased, and I’ll select to not deal with elements that you simply contemplate necessary. Your monetary targets could also be completely different. You might have a distinct threat profile. Chances are you’ll be in a distinct life stage than I’m in. Therefore, it’s essential to NOT base your funding selections primarily based on my writings. There isn’t any one-size-fits-all answer in investments. What could also be funding for sure traders might NOT be good for others. And vice versa. Subsequently, learn and perceive the product phrases and situations and contemplate your threat profile, necessities, and suitability earlier than investing in any funding product or following an funding strategy.