This provision allowed substantial reduction in tax payment, depending on how long the property was in possession.When inflation was higher than increase in property price–or property lost value–taxpayers could claim capital loss, which would allow them to save taxes on other capital gains during a year.
After July 23, sale of houses bought after 2001 will attract 12.5% (long-term capital gain) tax. Depending on the amount involved the actual tax rate could go up to 14.95% (12.5% + 15% surcharge + 4% cess).
Unless you decide to buy another property and pay no tax at all.
Here’s an example:
- Market value of an inherited house purchased after 2001 (zero purchase price): Rs 5 cr
- Tax due: Rs 74.75 lakh (@14.95%)
- A new house worth Rs 5 crore (or more) bought
- Tax to be paid: Rs 0 (
tax exemption under section 54) - Market value of the house after two years (as there is a 2-year lock-in period): Rs 6 crore
- Tax due: Rs 14.95 lakh (on Rs 1 crore, difference between purchase-sale price)
- Tax saved Rs 58.8 lakh (Rs 74.75 lakh – Rs 14.95 lakh)
Even this tax can be saved if the amount is invested in capital gains bonds (e.g. REC, NHAI, PFC) up to Rs 50 lakh. If the property is held jointly, the eligibility goes up to Rs 1 crore. The section 54 benefit is capped at Rs 10 crore.
“While withdrawal of indexation benefit will hurt middle-class investors who had diversified into real estate, for those in a position to reinvest in a new property, there is a way to cut the tax outgo or reduce it to a negligible amount,” says Surya Bhatia, founder AM Unicorn.
The chance to buy your way out of paying long-term capital gains tax on sale of old properties has experts anticipating a pick-up in housing market.
