The budget announcement, tweaking the tax rules for real estate, has created confusion among homeowners as to whether the new regime will be beneficial or whether they will have to pay more tax when selling properties.
The two key changes are a reduction in the long-term capital gains (LTCG) tax rate from 20 percent to 12.5 percent, and the removal of the indexation benefit when calculating the tax rate.
There is no straightforward answer to how these changes will affect homeowners, as the tax outgo varies significantly, depending on various factors.
To understand how this tweak affects taxpayers, Moneycontrol reviewed a sample of six localities and analysed the impact on capital gains tax, if a homeowner were to sell his/her property under the new regime, compared to the old regime.
Of the 20 scenarios analysed, taxpayers will face an additional burden under the new regime in 14 , while in 6, homeowners will benefit under the new rules.
Of the six localities, three are from South Delhi – Greater Kailash, Vasant Vihar, and Defence Colony. The data also includes Mumbai’s Bandra West and Bengaluru’s Koramangala. Prices in these areas during 2001, 2011, 2016, and 2022 have been used for calculations. The analysis assumes the homeowner has not incurred any expenses on repairs or maintenance.
Who loses?
Properties purchased in 2011 and being sold now would be impacted the most by the new rules. For instance, a 200-square-yard home purchased in Koramangala, Bengaluru, and being sold now would incur 69 percent higher tax . The purchase price would be Rs 99 lakh and the sale price would be around Rs 2.52 crore. Under the old regime, the tax payable would have been Rs 11 lakh, compared to Rs 19 lakh under the new regime.
The difference is even starker in the case of Bandra (West), Mumbai. Under the old regime, if a taxpayer sold a property acquired in 2011, he would have made capital losses of Rs 15 lakh, which could be adjusted against other tax liabilities. Under the new scheme, the same person would have to pay Rs 59 lakh as LTCG.
Even properties acquired in 2016 will see an additional tax outgo, if sold today.
For instance, a taxpayer who purchased a home in Greater Kailash in South Delhi will have to pay 150 percent higher tax due to the change in rules, as the tax liability goes up from Rs 20 lakh to Rs 50 lakh.
Similarly, if the property was located in Defence Colony also, the tax liability would have increased by 150 percent. However, a Vasant Vihar homeowner will end up paying only 66.7 percent additional tax under the new regime for the 2016 property – lower than his or her peers in Greater Kailash and Defence Colony.
This is because the property rates in Vasant Vihar have seen higher appreciation in prices, compared to the other two localities. Koramangala in Bengaluru saw even higher appreciation in property prices since 2016 – beating all other localities in the study. As a result, homeowners of Koramangala would incur only 25 percent higher tax.
Who gains?
Data analysed by Moneycontrol showed that older properties from 2001 may benefit from the new tax rules.
Although inflation growth has been steep since 2001, the appreciation in property prices is far higher, and hence the reduced tax rate more than compensates for the loss of the indexation benefit.
A property purchased in 2001 in Greater Kailash, if sold today, would see 23 perecent less tax. Defence Colony and Vasant Vihar see a similar trend, while a Koramangala house would see 8.7 percent less tax. Only in the case of Bandra, the taxpayer may have to pay a marginally higher tax of 9.5 percent, under the new rules.
Bandra: from capital losses to capital gains
Data collected by Moneycontrol show Bandra homeowners, who would have made capital losses in the old regime, would not make capital gains and may have to shell out tax in 3 out of 4 scenarios. And in all the four scenarios, the total tax outgo of Bandra homeowners is going up, data showed.
For instance, if a Bandra property acquired in 2011 were to be sold today, under the old rules, the homeowner would have suffered a tax loss of Rs 15 lakh, but under the new regime, he would have to pay about Rs 60 lakh as capital gains tax.
A property acquired in 2016 in Bandra, if sold today, would have incurred a capital loss of Rs 51 lakh under the old regime, but under the new regime, the tax would be Rs 12 lakh .
This peculiar trend in Bandra is on account of the slower growth in real estate prices. Since 2016, Bandra properties have grown by 10 percent in value while all others have grown in the range of 50-75 percent, data showed. In such situations, removal of indexation benefit will have a significant impact.
The data analysed by Moneycontrol draws two key conclusions.
One, the new tax regime is beneficial in cases where the property has given more than 10 percent CAGR since the initial acquisition. Secondly, for every percentage point increase in property returns, the additional tax burden under the new regime falls significantly.
In the case of purchases in 2016, the Greater Kailash and Defence Colony properties grew at 5.2 percent CAGR and their additional tax outgo was around 150 percent under the new regime. In Vasant Vihar, the CAGR was 6.1 percent and the additional tax burden fell to 66.7 percent. Further, Koramangala saw a CAGR growth of 7.2 percent and the tax burden under the new rules came down to 25 percent extra.
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