Long-term capital gains in the case of immovable assets are taxed at 20 per cent, while short-term capital gains are taxed at 30 per cent. (Representational image)
The Budget 2017-18 has lowered the holding period for gains to qualify as long-term in the case of immovable property to two years from three years currently. This will significantly reduce the tax burden of people selling properties after two years and promote investment in the real estate sector. The government also changed the base year to which acquisition cost of an immovable asset is indexed to. The new base year is now 2001, against the earlier year of 1981. This will enable people to improve the acquisition cost of their immovable assets, thereby reducing their overall capital gains.
“We also propose to make a number of changes in the capital gain taxation provisions in respect of land and building. The holding period for considering gain from immovable property to be long term is three years now. This is proposed to be reduced to two years. Also, the base year for indexation is proposed to be shifted from April 1, 1981, to April 1, 2001, for all classes of assets including immovable property. This move will significantly reduce the capital gain tax liability while encouraging the mobility of assets,” Jaitley said.
Long-term capital gains in the case of immovable assets are taxed at 20 per cent, while short-term capital gains are taxed at 30 per cent. Earlier, any capital gain on sale of a property within three years of purchase was taxed at 30 per cent, which will now reduce to 20 per cent if it is sold after two years.
The existing provision of the Income
Tax Act provides for concessional rate of tax and also indexation benefit for taxation of capital gains arising from transfer of long-term capital asset. To qualify for long-term asset, an assessee is required to hold the asset for more than 36 months, subject to certain exceptions; for example, the holding period of 24 months has been specified for unlisted shares.
“With a view to promote the real-estate sector and to make it more attractive for investment, it is proposed to amend Section 2 (42A) of the Act so as to reduce the period of holding from the existing 36 months to 24 months in case of immovable property, being land or building or both, to qualify as long-term capital asset,” according to the finance ministry in the Budget documents.
This will promote investment in immovable property, the ministry said.
“Holding period for immovable property reduced from three to two years to achieve long term status for capital gains tax – will encourage more transactions through banking channels,” said Maadhav Poddar, tax partner, real estate practice, EY India.
As the move is expected to lower tax liability, it is likely to incentivise sellers to show the actual value of property as opposed to often understated price in such transactions and thereby, boost individual investments in the sector.
The Budget documents said that the base year for computation of capital gains has become more than three decades old and assessees were facing genuine difficulties in computing the capital gains in respect of a capital asset, especially immovable property acquired before April 1, 1981 due to non-availability of relevant information for computation of fair market value of such asset April 1, 1981, and thereby, the government has proposed to amend Section 55 of the Act.
The government also extended scope of long term bonds under section 54EC to provide that capital gain to the extent of Rs 50 lakhs arising from the transfer of a long-term capital asset shall be exempt if the assessee invests the whole or any part of capital gains in certain specified bonds, within the specified time. Currently, investment in bond issued by the National Highways Authority of India or by the Rural Electrification Corporation Limited is eligible for exemption under this section. In order to widen the scope of the section for sectors which may raise fund by issue of bonds eligible for exemption under section 54EC, it is proposed to amend section 54EC so as to provide that investment in any bond redeemable after three years which has been notified by the Central Government in this behalf shall also be eligible for exemption, the Budget documents said. This amendment will take effect from April 1, 2018.
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Also, in a major relief to housing developers who have seen a slowdown in sales after demonetisation, the government changed the time period for calculation of notional rental on unsold stock held by developers for tax purposes, which will now kick in only 1 year aftercompletion.
“At present, the houses which are unoccupied after getting completion certificates are subjected to tax on notional rental income. For builders for whom constructed buildings are stock-in-trade, I propose to apply this rule only after one year of the end of the year in which completion certificate is received so that they get some breathing time for liquidating their inventory,” Jaitley said in his Budget speech.
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This measure is give some relief to housing developers, who have been facing cash flow problems over the last few years due to high unsold stock in most of the cities.