Budget 2024: Investing in real estate? Check how income tax amendments can affect your property transactions

Budget 2024: In the Union Budget 2024 tabled in the Lok Sabha on Tuesday, Finance Minister Nirmala Sitharaman proposed some amendments to the income tax laws, which will have far-reaching implications for real estate transactions. Let us discuss them.

Removal of indexation benefits

Your investment in real estate becomes long-term after you have held the same for more than 24 months. To compute long-term capital gains on the sale of any immovable property held for more than 24 months, you were allowed to enhance your cost of acquisition of the property by applying the cost inflation index (CII) until now- this effectively reduced the taxable long-term capital gains.

Let us understand this with an example. If you had bought a plot of land in January 2015 for ₹1 crore and sold the same for ₹2 crore in January 2024, though your actual capital gains is ₹1 crore, but your taxable long-term capital gains would be lower due to application of CII.

The CII for the year of purchase is 240, whereas the CII for the year of sale is 348. So your indexed cost would be computed by multiplying the cost by CII of year of sale and dividing by CII of the year of purchase, i.e., 10,00,000*348/240=1,45,00,000 and the taxable long-term capital gain would be Rs. 55,00,000/-.

This amendment comes into effect immediately from July 23, the date of its announcement in the Union Budget, and would impact even those cases where the deal had been finalised, but the agreement was not executed.

Please note that if you acquired the property prior to April 1, 2001, you are still allowed to adopt the fair market value of the property as of April 1, 2001. This benefit will continue to be available for all the properties acquired before this date.

To arrive at fair market value, you can adopt the rate adopted for stamp duty purposes or obtain a valuation report from a registered valuer. The valuation, as per the valuer’s report, cannot be higher than the one adopted for stamp duty purposes.

Reduction in tax rate of long-term capital gains

While removing the indexation benefits, the government compensated the taxpayers by reducing the applicable tax rate on long-term capital gains from 20% to 12.50% on all investments, except in the debt category. The combined impact of the removal of indexation benefits and reduction in the tax rate would vary depending on how long you have held the asset.

In the above example, the tax payable would be Rs. 12.50 lakh (12.50% on ₹1 crore) without indexation and Rs. 11.50 lakh @ 20% on ₹55 lakh (indexed profits).

Impact for those who wish to avail tax exemption on long-term capital gains by investing in a residential house

Those who wish to sell their existing residential house and buy a new one to avail themselves of the exemption available under Section 54 of the Income Tax Act will have to invest a higher amount as the taxable long-term capital gains would be higher without the benefit of indexation.

In the example above, you would have to invest ₹1 crore to avail of the exemption instead of ₹55 lakh if the indexation benefit continued. Please note that in case you wish to sell any long-term capital asset other than a residential house and wish to claim an exemption under Section 54F by investing in a residential house, removal of indexation benefit will not impact you, as you are anyway required to invest the net sale consideration on sale of the asset sold, irrespective of the amount of taxable capital gains.

If you do not invest the full sale consideration for Section 54F and capital gains for Section 54, your tax liability may be impacted by the combined impact of removing the indexation benefit and loweringtax rates on long-term capital gains.

Clarification with respect to tax deduction on purchase of immovable property

A buyer of an immovable property is required to deduct tax at 1% on the purchase price if the sale consideration exceeds ₹50 lakh. In cases where there is more than one buyer or seller, there was some confusion as to whether the threshold limit of ₹50 lakh was to be considered concerning the share of each joint buyer/seller or for the aggregate value of the property.

The same has been clarified with the amendment of Section 194IA. Each buyer has to deduct the tax at 1% if the aggregate amount to be paid for the property exceeds the threshold of ₹50 lakh.

Tax to be deducted in case of rent payments by individual and Hindu Undivided Family

Presently, each individual or Hindu Undivided Family has to deduct tax at 5% of any amount payable as rent if the rent for a month or part of the month exceeds Rs. 50,000/-. The provision applies to any amount payable for the use of any land or building.

Tax deductions must be made during the last month of the year or the last month of the tenancy. To provide relief, Finance Minister Nirmala Sitharaman has proposed a reduced rate of 2% instead of 5% presently applicable.

Balwant Jain is a tax and investment expert who can be reached at jainbalwant@gmail.com and @jainbalwant on X.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.