New Capital Gains Tax Regime: Benefits and Implications
Revenue Secretary Sanjay Malhotra confirmed that rollover benefits will persist on capital gains of up to Rs 10 crore within the new structure. “I want to clarify that if you sell the house and reinvest the capital gains (not the proceeds), only the capital can be reinvested into a house, and no capital gains will be applicable. The rollover benefit remains unchanged,” Malhotra informed Business Standard.
Movable gains up to Rs 10 crore can be reinvested, allowing for rollover benefits, effectively exempting them from capital gains tax,” he emphasized.
This clarification comes amidst criticism of the new capital gains tax regime introduced in the Budget. The updated tax rates for long-term capital gains (LTCG) and short-term capital gains (STCG) have caused some consternation.
These changes include an increase in the tax rate on long-term capital gains from 10% to 12.5% for equity, and a hike in the tax rate on short-term capital gains from 15% to 20% for equity. Additionally, the exemption limit on the sale of equity has been raised from Rs 1 lakh to Rs 1.25 lakh on LTCG.
The Income-Tax (IT) department released a comprehensive clarification on Wednesday.
The new capital gains tax on property, as proposed in the Budget, is advantageous for homeowners if the price appreciation exceeds “9-11%” per annum. However, if property appreciation remains in the single digits, the previous method of tax computation may be more advantageous.
The clarification underscores that most property owners will benefit from the change in capital gains taxation on real estate, as “nominal real estate returns generally range between 12-16% per annum, well above inflation.
Typically, the indexation benefit ranges from 4-5%, depending on the holding period. Therefore, the department expects significant tax savings for a vast majority of such taxpayers.
The department also presented several case studies comparing the new capital gains tax with the previous one to support these points. For instance, if a property was purchased for Rs 100 in 2009-10 (approximately 15 years ago), and is sold for Rs 700 today, the tax liability will be Rs 91 under the original method of computation. However, under the new method, the tax liability will be Rs 71.
Nevertheless, the variance between the two methods decreases as the sale value decreases. For instance, if the property is sold for Rs 490, the tax liability is around Rs 49 under both methods.
Using such case studies, the department concluded: “It is evident that the earlier tax rate is advantageous only when returns are low (less than approximately 9-11% per annum), but such low returns in real estate are unrealistic and infrequent.