Navigating the New Tax Landscape Post-Budget 2024
Selling a home can be a financially rewarding experience, but it also comes with the burden of Long-Term Capital Gains (LTCG) tax. The Budget 2024 has eliminated the indexation benefits, significantly impacting homeowners who sell their properties. This change means that sellers now face taxes on the full gains rather than the inflation-adjusted profits. However, there are still strategies available to minimize or even eliminate your LTCG tax liability. Read on to find out how.
Understanding the Impact of Budget 2024 on LTCG Tax
What Changed with Budget 2024?
- Removal of Indexation Benefits: Previously, homeowners could adjust the cost of their property for inflation, reducing the taxable gain. This benefit has been removed, meaning higher tax liabilities for sellers.
- Full Gains Taxed: Without indexation, the entire profit from the sale is now subject to LTCG tax.
How to Avoid LTCG Tax Under Section 54
What Is Section 54?
- Tax Exemption on Reinvestment: Section 54 of the Income Tax Act allows homeowners to claim an exemption on LTCG tax if they reinvest the gains into another residential property.
- Eligibility: To qualify, the new property must be purchased within one year before or two years after the sale of the old property, or constructed within three years.
Steps to Claim Section 54 Benefits
- Sell Your Residential Property: Ensure the property qualifies as a long-term capital asset (held for more than 24 months).
- Reinvest in a New Property: Purchase or construct a new residential property within the specified timeframe.
- Deposit Unutilized Gains in CGAS: If you cannot reinvest immediately, deposit the gains in a Capital Gains Account Scheme (CGAS) to maintain your eligibility for Section 54 benefits.
Key Conditions and Limitations
Single Property Purchase Limitation
- One House Rule: For capital gains exceeding ₹2 crore, taxpayers can only purchase or construct one residential property to claim the exemption.
- Capped Deduction: The Finance Act 2023 limits the total deduction to ₹10 crore, regardless of the actual reinvestment amount.
Three-Year Lock-In Period
- Lock-In Requirement: The newly acquired property must be held for at least three years. If sold earlier, the exemption under Section 54 is revoked.
Example: How Section 54 Works
If a homeowner earns ₹5 crore in LTCG from selling a house and reinvests the entire amount in a new property, they can claim a full exemption under Section 54. However, if only ₹3 crore is reinvested, the exemption applies only to that amount, and LTCG tax must be paid on the remaining ₹2 crore.
Using the Capital Gains Account Scheme (CGAS)
Why Use CGAS?
- Flexibility in Reinvestment: If you are unable to reinvest the gains immediately, deposit them in a CGAS. This allows you to defer the tax liability until you can purchase or construct a new property.
- Two-Year Investment Window: The amount in CGAS must be used within two years, or the exemption may be revoked.
Smart Strategies for Tax-Free Property Sales
Despite the changes introduced in Budget 2024, homeowners can still leverage Section 54 to minimize or eliminate LTCG tax when selling their property. By reinvesting in another residential property or utilizing the CGAS, you can protect your gains from heavy taxation. Understanding these provisions and planning your property transactions carefully will help you navigate the new tax landscape effectively.
