Real Estate- Budget 2017- Impact On Tax.
Real Estate- Budget 2017- Impact On Tax.
Head- Client Advisory at SNMA Enterprise Pvt. Ltd.
For those who churn real estate investments fast, well its quite unlikely now as the exits currently are with very little gains. But there is something definitely to cheer for.
In the Union Budget 2017-18, the finance minister Arun Jaitley, has proposed to reduce the tenure for LTCG (Long Term Capital gain) from 3 years to 2 years.
Re-basing the Year for indexation calculation to 2001, till now it has been 1981.
How will rebasing to Year 2001 help:-
First Let’s understand what is indexation- Indexation means that adding inflation to your cost price. For Ex. You buy an Apartment in year 2005 AT INR40Lacs and sell it Dec 2016 for Rs 1 crore, your profit turns out Rs 60Lacs. But wait with Indexation (Adding Inflation to Appartment price) your apartment cost actually becomes Rs 90.54 Lacs( Cost Inflation Index in 2005 was 497 and in Year 2016-17 is 1125) and your profit for the purpose of taxation is Rs 9.46 Lacs, now you pay a 20% Tax on this 9.46 Lac, which truns out to be meagre Rs 1.89 Lacs, odd.
Till now Year 1981 was the base year, this means that the purchase price of an asset bought before April 1, 1981 could be calculated on the basis of the fair market value of 1981. Now on, the purchase price will be calculated based on the fair market value of 2001.
This should benefits Property Owners- How ? Actual Inflation in property market between 1981 and 2001 is not captured in the current index, between 1981 and 2001, the index has jumped four times from 100 to 406 whereas property prices have surged 10 times in the same period. This shift in base year will help align the index with the actual rise in property rates, and help investors get the full benefit of index.
INHERITANCE & GIFTS:-
Sale of a property that is inherited or accepted as a gift will also attract capital gain/loss provisions even though you haven’t spent any money to acquire it. In such a case, capital gains will be computed based on the cost to the previous owner, indexed to the year of purchase.
In cases where the property has been inherited, the cost to the original owner will be considered as the cost of acquisition for computing capital gains. If the property has been acquired prior to 1 April 1981 (YEAR 2001- Going Forward), the acquisition cost will be the cost incurred by the original owner or the fair market value of the property as on 1 April 1981 ( Year 2001), whichever is higher.
Any money spent on improvement by the seller and the previous owner prior to 1 April 1981 ( Year 2001- going forward) will be ignored. For improvement expenses after this date, the indexed cost as per the relevant financial year will be added to the cost of acquisition
Some Options to Manage Long Term Cap Gain Taxation: –
You cannot avoid tax on short-term capital gains. However, you can claim deductions to lower the tax liability on long-term gains.
1. Buy a Residence: Long-term capital gains from selling a house get tax exemption if they are invested in buying or building a new house. The new house has to be bought one year before the transfer of the first house or within two years after the sale. The deduction allowed is equal to the actual investment or the capital gain, whichever is lower.
A. If you plan to use the gain to build a house, it must be done within three years of the sale of the property. When you buy a plot to build a house, the cost of land is included in the construction cost. Even buying an under-construction property entitles you to tax deduction.
B. One can buy an under-construction apartment to save capital gains tax, provided its construction is completed within three years of the transfer of the first property. If the new property is sold within three years of purchase or construction, the deduction is reversed and taxed as short-term capital gain.
Buying or constructing a house generally takes a long time. If you fail to make the investment before filing your tax return for the financial year, you can still avail of the deduction by letting the taxman know about your plan using the Capital Gains Account Scheme (CGAS).
2. INVEST in Cap Gain Bonds:-
If you do not intend to invest in a house, you can buy specified financial assets– Capital gains from sale of any long-term asset can be claimed as tax-exempt under Section 54EC of the Income-Tax Act by investing in notified bonds within six months of its transfer.
These bonds are issued by the Rural Electrification Corporation (REC) and the National Highways Authority of India (NHAI). The exemption is equal to the investment or the capital gain, whichever is lower. Duration of for 3 Year, Interest is generally lower than market @ 6% and now it should go even lower.
SNMA Capital Managers.