It has never been a secret that the property deals are often murky. Voluminous transactions happen in black, and thus real estate as an asset class has often been looked upon as a preferred safe haven to park and multiply black money.
The same holds true for gold.
While announcing demonetisation, the Government had stated that the note ban (or note bandi) in itself won’t be enough to curb black money and corruption. It must be supported by other initiatives as well.
And vide the proposal to tweak provisions for Long Term Capital Gain (LTCG) for immoveable property; it seems the Government has identified practical issues.
Taking into consideration that capital gains are vital to ascertain effective returns on investments. While Long Term Capital Gains on equity shares and equity oriented mutual funds are exempt, for other assets viz. real estate, gold, bonds and debt oriented mutual funds; it is taxable.
Suppose, your absolute returns on real estate and equity mutual funds are 60% respectively, and your holding period in each case is 5 years; as per the existing tax rules, the returns on the former would be subject to Long Term Capital Gain Tax, while for the latter will be fully exempt. Therefore, the returns post-tax in case of real estate would be lower than for equity mutual funds. This is because Long Term Capital Gain with indexation benefit attracts a 20% tax. As you may be aware, the indexation benefits help you adjust the cost of acquisition for inflation.
If the capital gains are reinvested in property or capital gain (tax saving) bonds, you could escape paying tax, subject to certain conditions (laid out under the specific provisions of the Income-tax Act, 1961) being satisfied.
But often, there are practical difficulties in meeting these conditions. Typically underreporting of capital gains takes place by dealing in cash. Many a times, the intent may not be to dodge tax authorities but to avoid the rigmarole and pain later, when there are practical constraints.
However things may change in FY 2017-18...
- The Government has proposed to shift the base year for the calculation of indexed cost to 2001 from 1981:
So far we’ve been using the year 1981 as the base year for indexation purpose. But in the recent years, the property prices have shot-up at a mind-boggling rate, while the gains were inefficiently adjusted for inflation. This made it a bad deal. Therefore, to make it favourable while selling ‘capital assets’, the aforesaid is proposed.
Change in the base year would lower the long-term capital gains on all ‘capital assets’ as a result of higher ‘indexed cost of acquisition’. For real estate and gold, this move may even help reduce the ‘cash component’ in deals.
- The period of holding to classify Long Term Capital Gain for immoveable property has been relaxed to 2 years (from 3 years at present):
This amendment will give respite to individuals who are looking to sell their properties and will aid liquidity in the asset class.
Notwithstanding the above, the Union Budget 2017-18 has proposed to limit exemptions that one can claim on interest payment on the home loan. It is noteworthy that this change will be applicable only for second homes. As per the existing provisions, there is no limit on exemptions one can claim, but from FY 2017-18 onwards, the exemption would be capped at Rs 2 lakh. So if you pay Rs 3 lakh as interest payment on your loan for the second home in FY 2017-18, you can square off only Rs 2 lakh against other heads of income.
Speaking of financial assets such as debt oriented mutual funds; the proposed changes may not affect debt oriented mutual funds as much as they might affect real estate transactions. Simply because, the price appreciation in case of debt mutual funds could be incomparably small vis-à-vis most real estate deals. Besides, very few investors actually hold debt funds for as long a period versus real estate assets or gold.
Having said that for Long Term Capital Gains, the Government might have to forgo considerable revenue that it otherwise earns vide capital gains tax. Nonetheless, it has figured out a mechanism to compensate a part of that.
All-in-all, we believe the proposed changes for Long Term Capital Gain has left a smile on the common man’s face. What do you think? Do share your views with us below.
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