Rollover benefits to continue on capital gains up to Rs 10 cr: Revenue secy

Revenue Secretary Sanjay Malhotra has clarified that rollover benefits will continue on capital gains of up to Rs 10 crore under the new structure.

“I want to clarify that in case you sell the house and invest the capital gains, not the proceeds, only the capital can push back into a house, there will be no capital gains. The rollover benefit which was there continues,” Malhotra told Business Standard.

“Capital gains up to Rs 10 crore can be reinvested and take the benefits of rolling over, which means that there will be no capital gains tax,” he underlined.

The clarification comes amid criticism over the new structure of the capital gains tax regime which was introduced in the Budget. The tax rates for long-term capital gains (LTCG) and short-term capital gains (STCG) have been changed.

These include raising the tax rate on long-term capital gains on equity from 10 per cent to 12.5 per cent, while the tax rate on short-term capital gains on equity was hiked from 15 per cent to 20 per cent. Besides, the exemption limit of Rs 1 lakh on the sale of equity has been raised to Rs 1.25 lakh on LTCG.

The Income-Tax (IT) department has come out with a detailed clarification on Wednesday.

The new capital gains tax on property proposed in the Budget works in favour of homeowners if the price appreciation is above “9-11” per cent. But if the property appreciation is in the single digits, the earlier method of computing tax is more beneficial.

The clarification points out that most property owners will benefit from the change in capital gains taxation on real estate, as the “nominal real estate returns are generally in the region of 12-16 per cent per annum, much higher than inflation”.

The indexation benefit is typically 4-5 per cent, depending on the holding period. “Therefore, substantial tax savings are expected for a vast majority of such taxpayers,” according to the department.

The department has also used several case studies comparing the new capital gains tax with the old one to support these points. One such example is of a property purchased for Rs 100 in 2009-10 – around 15 years ago. If the house is sold for Rs 700 today, the owner will pay Rs 91 tax if the old method of computation is considered. In the new method, the tax liability will be Rs 71.

However, the difference between the two keeps reducing as the sale value decreases. If the property is sold for Rs 490, the tax liability works out to be around Rs 49 in both methods.

Using such case studies, the department said: “It is clear that only where returns are low (less than about 9-11 per cent per annum) that the earlier tax rate is beneficial, but such low returns in real estate are unrealistic and rare”.