Investment in a house property is one of the most sought-after investments, primarily because you get to own a house. While other may invest with the intention of earning profit upon selling the property in the future. It is important to note that a house property is regarded as a capital asset for income tax purposes. Consequently, any gain or loss from the sale of a house property may be subject to tax under ‘Capital Gains’ head.
Capital Gain tax on property is levied specifically on the monetary profit from the sale or transfer of residential properties or lands by an individual who does not consider it a profession of such income is not his/her main domain of earning.
Long-Term Capital Gain (LTCG) & Short-Term Capital Gain (STCG)
Capital gains from the respective capital assets fall under that specific category of gains- long-term capital gain or short-term capital gain.
As per Union Budget 2024, the following amendments are effective from FY 2024-25
- For dividing assets into long term and short term, there will be only 2 holding periods: 12 months & 24 months. Note, the 36 month period has been removed.
- An immovable property that is held for more than 12 months will be termed as long-term.
- STCG on the sale of property will continue to attract tax at income slab rates.
- The taxation on LTCG is reduced from 20% to 12.5%.
- The indexation benefit that previously was available on the sale of long-term assets has now been eliminated. Hence, the sale of property made from 23rd July 2024 will attract a tax rate of 12.5% (without the indexation benefit)
But the Finance Minister on 6th August 2024 brought an amendment to the Finance Bill, 2024- individuals or HUF who bought houses before 23rd July 2024, can compute his/her taxes under new scheme (@12.5% without indexation) and old scheme (@20% with indexation) and pay the tax that is lower of two.
Capital Gain Tax on Property-Exemptions
An individual can avail of exemptions depending upon the kind of reinvestment he/she does post receiving the amount of consideration from such long-term capital gain.
Tax Exemption under Section 54
1 After budget 2019, exemption on capital gain tax on property is allowed to individuals who have reinvested the capital gain in a maximum of two housing properties. If no such investment takes place, then exemption is not available. Before Budget 2019, an individual could only invest in a maximum of one housing property.
2 Only the capital gain is allowed for reinvestment and not the entire sales consideration amount.
3 The total gain from capital gain should not exceed Rs 2 Cr.
4 The investment should be made one year before the sale has taken place or two years after it.
5 The exemption is available to an individual only once.
6 An individual can invest the capital gain in a construction project as well; such construction should be over within 3 years from the date of sale to avail exemption.
7 Any exemption will be revoked if the new property is sold within 3 years of purchasing it.
Tax Exemption under Section 54EC
1 Capital gain generated from the sale of housing property needs to be reinvested in specific bonds provided by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
2 The amount of investment cannot exceed Rs 50Lakh.
3 The investment amount can be redeemed by an individual after 5 years from the date of sale. This revised time frame was introduced in the FY 2018-19, before which the period was 3 years.
4 The investment needs to take place before filing tax for that respective year or within 6 months from the date of sale.
In case the individual is unable to invest before filing tax for that year, he/she can deposit the amount in PSU bank or any other bank listed under Capital Gains Account Scheme (1988). In that case, exemption on capital gain tax on the sale of the property will be consider legitimate. However, such deposit needs to be converted to an investment within 2 years from the date of sale, failing which it will be considered a short-term capital gain in the year of period lapse.
In the end, an individual depending on his/her use of capital gain can determine their capital gain tax on property. It will help them quantify the entire taxable amount for that year.
Waiting for your feedback on this blog.
Anil Malik
Mumbai, India
7th August 2024