Income Tax News: The general public perceives that, only recently, the long-term capital gains tax rate for real estate was reduced from 20% with indexation to 12.5% without indexation. This will be of benefit to most taxpayers by way of simplification of tax compliance and substantial savings.
Higher Nominal Returns Outpace Inflation
Nominal real estate returns normally lie between 12% to 16% per annum. This is really high when compared with inflation, normally indexed at about 4-5%, depending on the holding period. The new tax rate thus benefits most taxpayers substantially in savings.
Beneficial Scenarios Across Holding Periods
The following explains how the new regime benefits in different holding periods:
5-Year Holding Period: If the property is held for five years, the new tax rate is helpful where the property appreciates by 1.7 times or more.
10-Year Holding Period: In the case of a ten-year holding period, the new tax rate comes in handy if the value of the property increased by 2.4 times or more.
Long-Term Holding: In the case of properties purchased in 2009-10, the new regime is helpful where the value increased by 4.9 times or more.
Rare Scenarios Where Old Regime is Beneficial
The old tax rate with indexation proves beneficial only in cases where real estate returns are unusually low, around 9-11% per annum. However, returns of this order in the real estate market are considered rarity or even unrealistic.
Tax Exemptions on Reinvestment
The new tax regime has also retained considerable exemptions on capital gains tax when reinvested in the following avenues:
54EC Bonds: Investment in 54EC bonds up to Rs. 50 lakh exempts the capital gain from tax, subject to certain conditions.
Buying or Constructing a House: Reinvestment in buying or constructing a house for up to Rs 10 crore is also exempt from tax subject to certain conditions.
Simplification and Ease of Compliance
It has inherent advantages in terms of ease of compliance, simplicity in computation, and less burden of maintaining huge records. It would remove the different rates of taxes prevailing for different asset classes, making the system much simpler and more user-friendly.
The bringing down of the long-term capital gains tax rate from 20% with indexation to 12.5% without indexation in the case of real estate investments is, therefore, extremely welcome. Characteristically high returns prevailing in real estate bring substantial tax savings and simpler compliance through this change and hence encourage further investment in the sector. This shift is expected to benefit a vast majority of taxpayers and raise the general efficiency of markets.