In a recent announcement, Revenue Secretary Sanjay Malhotra clarified crucial aspects of the revised Long-Term Capital Gains (LTCG) taxation on immovable properties as proposed in the Union Budget 2024. The reworked LTCG tax regime, which aims to offer a lower tax rate but without indexation, has raised several questions among taxpayers and property investors.
Key Clarifications on LTCG Tax Calculation
Interest Cost Exclusion
One notable point made by Revenue Secretary Malhotra is that the interest cost incurred on loans taken to purchase immovable property will not be added to the base price for Long Term Capital Gains calculation. Under the existing mechanism, the base price for calculating LTCG is solely the price paid to the seller, excluding any interest paid on property loans. This provision remains unchanged in the new tax regime.
For example, if an individual purchases a property for ₹50 lakhs and pays ₹5 lakhs in interest over the loan period, the LTCG will still be calculated based on the initial ₹50 lakhs paid to the seller. Despite being a significant financial outlay, the interest cost will not be considered in the capital gain calculation.
Stamp Duty Exclusion
Similarly, the Revenue Secretary confirmed that stamp duty payments will also be excluded from the base price for Long Term Capital Gains purposes. This aligns with the existing system, where the capital gain calculation only includes the purchase price paid to the seller, disregarding additional expenses like stamp duty.
Broader Implications
Impact on Property Buyers
The exclusion of interest costs and stamp duty from LTCG calculations means that property buyers cannot offset these significant expenses against their capital gains. This could result in a higher tax burden, as the base price for calculating LTCG does not reflect the total expenditure incurred in acquiring the property. Buyers who finance their property purchases through loans and those who pay substantial stamp duty fees might find themselves at a disadvantage under this tax regime.
Real Estate Market Dynamics
These clarifications could further influence the real estate market by affecting investment decisions. The inability to include all incurred costs in the LTCG calculation might make real estate investments less attractive compared to other investment options where all costs are considered in the tax calculations. Investors may need to reassess their strategies, potentially impacting market dynamics and property prices.
Simplification of the Income Tax Act
In addition to LTCG tax clarifications, Malhotra touched upon the ongoing review of the Income Tax Act of 1961. The primary goal of this review is to simplify the existing act, making it more concise and easier to understand. An internal committee is working on this initiative, and stakeholder consultations will occur at an appropriate time. The upcoming budget might include a bill introducing a new Income Tax law aimed at enhancing clarity and compliance.
Resolution of Angel Tax Litigation
Malhotra also addressed the issue of old litigation related to Angel Tax, indicating that these cases might be resolved under the new Direct Tax Vivad se Viswas scheme. This scheme aims to provide a dispute resolution mechanism for pending tax litigations, offering taxpayers a way to settle disputes efficiently.
Revenue Secretary Sanjay Malhotra’s recent clarifications provide essential insights into the revised LTCG taxation on immovable properties. The exclusion of interest costs and stamp duty from the base price for LTCG calculations remains a critical point of consideration for property investors and buyers. As the government continues to refine and simplify tax laws, it is vital for taxpayers to stay informed and adapt their financial strategies accordingly. The broader implications of these changes on the real estate market and investment decisions will unfold as the new tax regime comes into effect.
