Union Budget 2017: Arun Jaitley Gives Tax Relief On Gains From Property Investments

Finance Minister Arun Jaitley in Union Budget 2017-18 has proposed a number of changes that will attract lower tax on gains from property investments. Mr Jaitley proposed that the holding period of a property for qualifying as long-term gains will get reduced to two years, from three years currently.

According to the current tax norms, if a property is sold within three years of buying, the profit from the transaction is treated as short-term capital gains and is taxed according to the slab rate applicable to him/her.

For example, if a person in 30 per cent tax bracket (income above Rs 10 lakh) makes a gain of Rs 10 lakh on property transaction (sold within three years of acquisition), he/she has to pay a tax of Rs 3 lakh on the transaction (excluding surcharge and cesses).

According to the proposed new change, this three-year window will get reduced to two years. Thus, after two years, the transaction will be able to qualify for long-term capital gains, thus lower taxes.

Under long-term capital gains on immovable properties, the profit is taxed at 20 per after indexation. Under indexation, inflation during the holding period is taken into account and thus the purchase price is adjusted, reducing the tax burden on the property seller. There are also other benefits for the seller under the long-term capital gains tax.

Also, if the gains are invested in some select government investment schemes, the tax liability goes down significantly.

The finance minister also proposed to increase the base year for indexation 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," the Finance Minister said in his Budget speech.

The finance minister also proposed to extend the basket of financial instruments in which the capital gains can be invested without payment of tax.

With the period for reckoning the long-term capital gains on immovable property been reduced to from 3 years to 2 years, it is a positive step for the real estate sector, said Sandeep Sehgal, director for tax and regulatory at Ashok Maheshwary & Associates LLP.

But "with restriction of set-off of loss under house property having been restricted to Rs 2 lakh, this is a dampener", he added. "Earlier HNIs used to buy properties on loan and were able to set off the full interest liability against the lettable value of property usually resulting in loss which would substantially bring down tax liability and consequently their borrowing costs. This avenue is now closed" Mr Sehgal said.