Skip to main content

Understanding the Changes to Long-Term Capital Gains (LTCG) Tax on Property Sales


If you're planning to sell a residential property that you've held for more than 24 months, you'll need to be aware of the recent changes introduced in the Union Budget 2024 regarding long-term capital gains (LTCG) tax. Here’s what you need to know, explained in simple terms.

New Tax Rules on Property Sales
1. Reduced Tax Rate: The tax rate on long-term capital gains from selling a property has been reduced from 20% to 12.5%. This sounds like good news, right? But there’s a catch.
2. No More Indexation Benefit: Previously, we could adjust the purchase cost of the property for inflation, thanks to the indexation benefit. This adjustment helped reduce our taxable gains and, in turn, the tax we had to pay. But now, this benefit has been removed.
3. An Important Option: After hearing concerns from many, the government decided to offer some relief. Now, we can choose between two tax options:
  • 12.5% tax rate without indexation
  • 20% tax rate with indexation
This choice is available for properties bought before July 23, 2024, which is great news if you’re worried about the changes being applied retroactively.

What Counts as the Cost of Acquisition?
When selling your property, one of the key questions is: What counts as the cost of acquisition? The cost of acquisition is basically what you paid to buy the property, including certain expenses. However, the new rules are a bit tricky when it comes to including things like stamp duty and home loan interest.

Stamp Duty and Home Loan Interest:
If you’ve claimed deductions on your home loan interest under Section 24(b) of the Income-tax Act, that interest can’t be added to the cost of acquisition when you sell the property. Similarly, if you claimed a deduction for stamp duty under Section 80C, you can’t include that in your cost of acquisition either.

Relevant Case Law
In CIT v. Maithreyi Pai [1985] 152 ITR 247, the Karnataka High Court ruled that an amount already claimed as a deduction in computing total income cannot be claimed again under another head. This decision means that interest claimed under Section 24(b) of the Act cannot be included in the acquisition cost for calculating long-term capital gains (LTCG). However, taxpayers were still taking advantage of double deductions—a loophole that has now been closed for property sales occurring on or after April 1, 2024. Yet, according to the rationale in the case of Maithreyi (supra), any interest on borrowed funds exceeding the Rs. 2 lakh deduction limit for self-occupied property, which wasn't allowed as a deduction under Section 24, could still be added to the property's acquisition cost. This excess interest would then be eligible for indexation benefits when the property is sold, affecting the capital gains calculation at the time of sale.

An Example to Make It Clear
Suppose I bought a home for self-occupation for Rs 2 crores. I paid Rs 10.5 lakh in stamp duty, out of which I claimed Rs 1.5 lakh under Section 80C. I also paid Rs 8 lakh in home loan interest, claiming Rs 2 lakh per year under Section 24(b). Now, if I decide to sell this home after 24 months for Rs 2.25 crores, here’s how the cost of acquisition would be calculated:
I can add the Rs 9 lakh unclaimed stamp duty and Rs 4 lakh unclaimed interest to the original cost of Rs 2 crores, making the total Rs 2.13 crores.
The taxable LTCG (without indexation) would then be Rs 12 lakh (Rs 2.25 crores - Rs 2.13 crores).

What Does This Mean for Us?
The Budget 2024 changes offer some flexibility with tax options, but the removal of the indexation benefit could impact our tax planning.

Staying informed about these updates will help us make better decisions when selling property.
Labels:

Comments

Post a Comment

Popular posts from this blog

Maintenance Charges Default: No Water, No Sympathy

In what can only be described as a case of forum shopping (trying to find the friendliest court), an apartment owner in Shiv Vihar CHS, Dombivali (East), took his complaints on a legal tour. The petitioner, Vilas Gopal Dongare member of the society was unhappy. Why? Because his water supply was cut off. The reason? He had not paid his maintenance bills, which had piled up to a whopping Rs. 7 Lakhs! Despite making several complaints about the alleged harassment by the society and even a water tank causing structural issues in his building, his cries were heard and promptly dismissed. The Maharashtra State Human Rights Commission looked into his case and, on 05.02.2020, decided it was not a human rights violation. They said, “Pay your bills first.” The society initiated proceedings under Section 101 of the Maharashtra Co-operative Societies Act, 1960 (MCS Act) to recover arrears and got a Recovery Certificate issued in its favour. When the petitioner’s appeal against this certificate wa...
Post a Comment
Read more

AMORTISED COST CALCULATION: THE EFFECTIVE INTEREST RATE (EIR)

IAS 39 mandates some financial assets and liabilities to be subsequently measured at ‘amortized cost’.  This measurement concept is a management theory put in accounting practice. It means that the contractual interest rate each period should be adjusted to amortize the transaction costs over the expected life of the financial instrument. The amortization is calculated on an effective interest rate (EIR) / yield-to-maturity (YTM) basis. The EIR is the rate that exactly discounts the stream of principal and interest cash flows excluding any impact of credit losses, to the initial net proceeds. It is important to note that EIR method does not take into account any future credit impairments anticipated on that instrument. The carrying amount of the financial instrument subsequently measured at amortized cost is computed as: Transaction costs are an integral part of the amortized cost calculation. They are defined as costs that are directly attributable to the acquisit...
49 comments
Read more

Court Upholds Co-operative Membership Transfer with Release Deed

In the case of Bima Nagar Co-operative Housing Society Ltd. v. Divisional Joint Registrar & Ors. WP 10768 of 2024 , the Bombay High Court on 23.09.2024 dismissed the society’s petition challenging the membership transfer to Pushpa Morey, a widow, following her husband's death. Initially, Pushpa was granted provisional membership but was later denied full membership by the society. Pushpa applied for full membership after her husband's passing. When the society refused, she sought help from the Deputy Registrar, who ordered that the society admit her as a full member under Section 22(2) of the Maharashtra Co-operative Societies Act, 1960. The society’s appeal to the Divisional Joint Registrar was unsuccessful, prompting the writ petition in the Bombay High Court. The society argued that the "family arrangement" concept under Section 154B-13 of the Maharashtra Co-operative Societies Act applies only to a Hindu Undivided Family (HUF). Pushpa, however, contended tha...
2 comments
Read more