Amount to be re-invested in tax saving avenues for seeking exemption on Long Term Capital Gains Tax on Sale of Immovable property in India
- Neha Lodaya
- Jan 13
- 3 min read
Typically, resident individuals liquidate their immovable residential property and re-invest in another immovable property in India, to seek tax exemption on Capital Gains as per section 54 of the IT Act. Subject to other conditions being met, the exemption is granted only if the “capital gains” are re-invested in purchase / construction of residential property / deposited in capital gains account scheme (within the prescribed timelines).
Post the revamp of the capital gains tax regime, especially on sale of immovable property (which is acquired prior to 23 July 2024), resident individuals have to compute their Long-term Capital Gains (‘LTCG’) Tax liabilities under two scenarios and determine which one is more beneficial for them:
👉🏼Scenario 1: Pay 20% tax on capital gains after adjusting the purchase price for inflation (i.e., adjustment of inflation index on the purchase cost / fair market value as on 1 April 2001). (“Old regime with indexation benefit”)
👉🏼Scenario 2: Pay a 12.5% tax on capital gains without indexation adjustment. (“New regime without indexation benefit”)
Let’s understand the preliminary calculation of the LTCG tax liability on sale of an immovable residential property in India, under both the Scenarios, by way of an illustration provided as under:
Table 1
Particulars | Scenario 1 (Old regime with indexation benefit) | Scenario 2 (New regime without indexation benefit) |
Sale Consideration | 6,00,00,000 | 6,00,00,000 |
Less: Indexed cost of Acquisition (for Scenario 1) / Cost of Acquisition (for Scenario 2) | (2,32,00,000) | (64,00,000) |
Long Term Capital Gains | 3,68,00,000 | 5,36,00,000 |
Long Term Capital Gains Tax (@20% under Scenario 1 / @12.5% under Scenario 2) (Note: We have ignored surcharge and cess for ease of calculation) | 73,60,000 | 67,00,000 |
In the above scenario, one may ponder on what should be the amount that may be required to re-invest in a house property / CGAS Scheme in order to claim LTCG tax exemption.
As per the Computation in Table 1 above, while Scenario 2 is more beneficial as it results in lower LTCG tax liability of INR 67 lakhs as compared to Scenario 1 where the LTCG tax liability is INR 73.60 lakhs. However, the question arises, on the quantum of re-investment in tax saving avenues.
Let’s explore the LTCG tax liability in a scenario where the individual parks only up to INR 4 crore in a new residential property / CGAS (vis-à-vis INR 5.36 Crs) and invests the balance available funds in units of Mutual Funds / other class of assets.
Table 2
Particulars | Scenario 1 (Old regime with indexation benefit) | Scenario 2 (New regime without indexation benefit) |
Sale Consideration | 6,00,00,000 | 6,00,00,000 |
Less: Indexed cost of Acquisition (for Scenario 1) / Cost of Acquisition (for Scenario 2) | (2,32,00,000) | (64,00,000) |
Long Term Capital Gains | 3,68,00,000 | 5,36,00,000 |
Less: Investment in tax saving avenues (within prescribed timelines) | 4,00,00,000 | 4,00,00,000 |
Long Term capital gains (post re-investment u/s 54) | NIL | 1,36,00,000 |
Long Term Capital Gains Tax (@20% under Scenario 1 / @12.5% under Scenario 2) (Note: We have ignored surcharge and cess for ease of calculation) | NIL | 17,00,000 |
As per the amended provisions of the IT Act, if, LTCG tax computed under Scenario 2 exceeds the LTCG tax under Scenario 1, then such excess of tax has to be ignored for computation purposes, thereby restricting the LTCG tax burden that may arise pursuant to the introduction of New Regime (without indexation).
Based on the above understanding, since there is no LTCG tax liability under Scenario 1, the excess of Tax Liability under Scenario 2 of INR 17 lakhs should be ignored for purpose of computing LTCG Tax of the individual.
Hence, even if the individuals re-invest INR 4 Crs (instead of INR 5.36 Cr), in our view, they should get the LTCG tax exemption on sale of immovable property acquired prior to 23 July 2024.
