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Senior Citizen Asks: Capital Gains Tax on Real Estate Sale - Indexation or LTCG?

Ramalingam

Ramalingam Kalirajan  |7981 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Nov 04, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Asked by Anonymous - Oct 24, 2024Hindi
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Dear Sir, I am a senior citizen and wish you to guide me on which strategy to follow on calculating Capital Gains (i.e. with or without indexation) on real estate sale and decide whether it is better to pay LTCG or avoid it by making investment into suitable govt. infra bonds etc.. I am not keen on reinvesting into Real estate as I need to keep money in relatively liquid form. I purchased residential property in 1992-93 for Rs 4 Lakhs , payment was done in installments : Sale agreement done in Sep'92 and final payment done and possession taken in Sep'93. Over the years I have spent about Rs 80000 on upkeep of flat. I sold the property in FY 2024-25 and received payment in installments: Sale agreement done in April 2024 for sale value of Rs 65 Lakhs and sale was concluded with receiving final installment by 10 Jul 2024. I need to know my LTCG liability or what could be an alternate option to invest the money elsewhere to save on tax or for better returns. Thank you in advance.

Ans: Calculating the capital gains tax on your property sale requires careful consideration of various factors, such as the use of indexation. You acquired the property in 1992-93, and it has appreciated in value, so calculating your indexed cost of acquisition will help you determine the tax liability accurately.

Key Points for Calculating LTCG Tax:

Indexed Cost of Acquisition: Use indexation to adjust the purchase price to reflect inflation. This can significantly reduce your taxable gains. With indexation, you’ll apply the Cost Inflation Index (CII) from the purchase year (1992-93) to the sale year (2024-25). This will be based on the CII values for the years in question.

Indexed Cost of Improvements: The Rs 80,000 spent on upkeep can also be indexed. Indexing both acquisition and improvement costs helps lower your LTCG.

Capital Gains Tax Rate: The LTCG on real estate is taxed at 20%. However, understanding your indexed gain will be key in calculating your exact tax liability.

Exploring Options to Save on LTCG Tax

Since you prefer liquidity and are not interested in reinvesting in real estate, there are other avenues to save tax while keeping your funds accessible.

Investment in Government-Approved Infrastructure Bonds (Section 54EC)

Tax-Saving Advantage: Section 54EC allows tax exemption by investing in bonds issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC).

Investment Limits: You can invest up to Rs 50 lakh within six months of the sale to claim the exemption.

Lock-In Period: The bonds have a lock-in period of five years. After this, they become liquid, and the principal is returned.

Returns: These bonds provide a fixed interest rate but are lower compared to other investment avenues. The focus here is on tax savings and capital preservation.

Direct Payment of Capital Gains Tax

If tax savings aren’t the priority, consider directly paying the LTCG tax. Calculating your LTCG liability after indexation will give you a clear figure, allowing you to keep the remainder liquid for future financial needs.

Final Tax Amount: After calculating the indexed gains, you’ll apply the 20% LTCG tax rate to arrive at your liability. Paying the tax and investing the remainder in high-liquidity instruments, like debt funds, could be beneficial.

Alternative Investment Options for Better Returns

For liquidity and regular returns, consider alternatives outside of real estate and infrastructure bonds:

Debt Mutual Funds

Suitable for Senior Citizens: Debt funds are suitable for those seeking steady returns without high market exposure.

Liquidity: Unlike bonds, debt funds offer better liquidity, allowing you to withdraw your funds if needed.

Tax Efficiency: Debt mutual funds held for over three years also benefit from indexation, lowering your tax liability.

Important Note: For debt mutual funds, gains are taxed according to your income tax slab rate, so consider the overall tax impact.

Senior Citizen Savings Scheme (SCSS)

Guaranteed Returns: SCSS provides fixed returns and is specifically tailored for senior citizens.

Liquidity: While there’s a five-year lock-in, premature withdrawal is allowed with some penalty.

Taxation: The interest earned is taxable, but there’s no capital gains implication. SCSS is ideal if you seek stability with limited flexibility.

Final Insights

Calculating LTCG on real estate involves understanding the impact of indexation. While bonds provide tax benefits, they may not meet your need for liquidity. Debt mutual funds and SCSS offer an alternative route, with SCSS giving stability and debt funds offering flexibility.

If you have further questions or would like help with precise calculations, consult a certified financial planner.

Best Regards,
K. Ramalingam, MBA, CFP
Chief Financial Planner
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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