Understanding Capital Gains: Before & After the Budget 2017-18

The Union Budget 2017-18 has generated a wave of optimism for all the stakeholders of real estate sector. While ‘affordable housing’ was the showstopper, there were a few alterations in the capital gains tax structure that had major takeaways for the investors planning to sell their property.

First, let’s understand what are Capital Gains. In simple words, when an individual sells his property, he earns certain profit amount which is taxable. Now, based on the holding period of the property, the tax incurred on this profit falls under short-term and long-term categories. Thus, to make things simpler for you, Bluering Realtech delves deeper into the changes made in the capital gain norms in this budget.

Holding Period Reduced from 3 Years to 2 Years

Before: Until now, individuals holding their property for more than 3 years (long-term capital gains) would get flat 20 per cent deduction on the profits. However, any property that was sold before three years from the date of purchase fell in the short – term capital gains where the profit was added to the seller’s income and taxed based on the applicable income tax slab.

Now, to save LTCG tax, several investors would reinvest the amount in various investment tools offered by the government. Unfortunately, for the STCG, tax was unavoidable!

After: The holding period for falling into the long-term capital gains bracket has now been reduced to two years. A great move for investors, this will make exiting a property cycle easier. This move is also likely to bring in more supply in the market in the coming months at a competitive rate. Well, with the revised norms, investors will no longer have to wait for three years to sell their properties.

More Instruments for Reinvesting

Before: Hitherto, the sellers could invest the capital gains in specific bonds for up to Rs 50 lakh issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months of sale.

After: The Finance Minister has proposed to introduce more instruments for reinvesting the capital gains.

Change in the base year for Indexation

Before: For calculating capital gains tax, indexation is applied which is recalculation of acquisition cost of an asset, after factoring Cost of Inflation Index (CII) of the year of purchase or sale of property. Now, for properties older than 1981, the purchase price was the fair market value of 1981. Considering the inflation over the last 35 years, it resulted in increased tax liability on the sellers.

After: Now, the purchase price considered for properties older than 1981 will be the fair market value of 2001. The move is likely to bring down the tax liability for the sellers who want to exit the market.

Capital Gains on Joint Development Agreements

Before: When a land owner and a developer entered into a JDA, one of the major concerns used to be the time when the capital gains should be taxed? Should it be after the construction is completed, or at the time of selling the building?

After: Clearing the ambiguities, now the capital gains on Joint Development Agreement (JDA) will be taxed only upon the completion of the project.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s