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The recent changes under Income Tax laws in India, particularly property related taxation, are reshaping the financial landscape for home buyers. From purchasing properties to managing capital gains and leveraging deductions, understanding the nuances of the new tax schemes rules is crucial for individuals planning to invest in real estate. Below is an exploration of the major changes in property related taxation aspects of the new tax regime and its implications on home buyers.
CHANGES IN CAPITAL GAINS TAXATION
The 2024 Budget introduced significant changes to capital gains taxation, particularly the removal of the indexation benefit for properties acquired after July 23, 2024. Earlier, the indexation benefit adjusted the purchase price of properties for inflation, reducing the taxable capital gains. While the indexation benefits are no longer available, the long-term capital gains (LTCG) tax rate has been reduced from 20% to 12.50%.however, for property acquired before July 23, 2024 the option of the old scheme with indexation benefit is still available even if the said property is sold /transferred on or after July 23, 2024.
Who benefits?
The new rule is advantageous for properties that have appreciated at a higher-than-average rate (above 8.5%-10.7% CAGR). However, for properties with substantial appreciation, the removal of indexation can increase tax liability significantly. Example: If a property purchased at ₹50 lakhs appreciates to ₹1 crore over a decade, the new rule might result in a higher tax outgo if the CAGR is below the break-even rate of 9.1%, as calculated using the RBI Housing Price Index data.
TAX IMPLICATIONS DURING PURCHASE
The Goods and Services Tax (GST) continues to apply to under-construction properties but not to completed ones. Home buyers should also note:
Stamp Duty and Registration Charges: These are set as per law of the land in reference to the property’s value, adding to the initial purchase cost.
TDS Requirements: A tax deduction at source (TDS) of 1% applies to properties priced above ₹50 lakh. For purchases from Non-Resident (NRI’s Sellers), TDS rates are higher. While TDS is a compliance to be done in certain cases, it does not addon to the property cost.
BENEFITS FOR HOME LOANS
Under the old tax regime, home buyers enjoyed substantial deductions on home loan interest and principal repayments:
Section 80C: Deductions of up to ₹1.5 lakh annually on principal repayment.
Section 24(b): Deductions of up to ₹2 lakh annually on interest repayment for self-occupied properties.
However, under the new tax regime, these deductions are not available. This shift emphasizes the need for home buyers to calculate the tax benefit of the old regime's deductions versus the new regime's lower tax rates before deciding.
RENTING OUT PROPERTIES
Rental income is taxed under "Income from House Property." The new regime's simplified rules may appeal to some landlords:
Standard Deduction: 30% of rental income is tax-free to account for maintenance costs.
Home Loan Interest Deduction: Interest paid on loans for rental properties can still be deducted, offering an incentive to landlords investing in rental housing.
TAX IMPLICATIONS UPON SELLING
When selling property, home buyers face:
Short-Term Capital Gains: Taxed as per the individual’s income slab if the property is sold within two years of purchase.
Long-Term Capital Gains: Post two years, LTCG applies. Under the new rules, the reduced 12.5% tax rate is a significant shift, though without indexation, the effective tax can vary depending on property appreciation rates.
TRANSITION FROM THE OLD TO NEW REGIME
Buyers must weigh the pros and cons of the two tax regimes:
The old regime provides exemptions and deductions, which can substantially lower taxable income, especially for high-value home loans.
The new regime offers simplicity with lower tax rates but eliminates many exemptions and deductions. For buyers not leveraging deductions (e.g., first-time buyers without large loans), the new regime might be more beneficial.
PLANNING TIPS FOR HOME BUYERS
When selling property, home buyers face:
Evaluate Holding Period: Maximize benefits by understanding short-term vs. long-term capital gains.
Seek Professional Advice: Tax consultants can help optimize tax under the old or new regime based on individual circumstances.
The new tax regime simplifies taxation but requires home buyers to re-strategize their investments to maximize tax benefits. Whether you're buying your first apartment, renting out properties, or planning long-term investments, staying well informed about tax policies is key. For many, the decision between old and new regimes will depend on individual financial goals, income levels, and the type of property being purchased.
To explore how Raj Housing can help you navigate these changes with premium properties in Goa, contact us today. Your dream home awaits with expert guidance every step of the way!
