Key Changes to Property Taxation Under India’s 2024 Budget

We tell you more about the key changes and their implications for property owners.

Rental Income Taxed Only Under “Income from House Property”

Previously, some taxpayers were declaring rental income from residential properties under “Profits and Gains from Business or Profession” to claim additional deductions like repairs and depreciation. This practice has now been explicitly prohibited.

Starting April 1, 2025, rental income can only be taxed under the “Income from House Property” (IHP). This means taxpayers will be eligible for fewer deductions such as the 30% standard deduction, municipal taxes, and interest on home loans.

While this move aims to ensure fair taxation, it could lead to higher tax outgo for property owners as deductions under IHP are limited compared to those available under business income.

Indexation Benefit Removed for Long-Term Capital Gains on Property

The government has reduced the long-term capital gains tax (LTCG) rate on property from 20% to 12.5%. However, it has also removed the indexation benefit, which allowed taxpayers to adjust the acquisition cost for inflation before computing gains.

Removing indexation will impact short-term investors where market price growth is less than 10%. For long-term investments (over 10 years) with property price appreciation exceeding 10% annually, the impact could be neutral or only marginally beneficial.

To mitigate the impact, the government is considering applying the indexation change prospectively from FY26 instead of the current year. Another proposal is to offer sellers a choice between a 20% rate with indexation and a 12.5% rate without indexation.

Reinvesting Gains in a New House Still Offers Tax Exemption

Despite the changes, taxpayers can still save on LTCG tax by reinvesting the gains in a new residential house under Section 54 of the Income Tax Act. The deduction is limited to the lower of the capital gains or the amount invested in the new house.

However, some new conditions apply:

• If the gains exceed ₹2 crore, only one house can be purchased.
• The maximum deduction is capped at ₹10 crore.
• The newly acquired house is subject to a 3-year lock-in period.

Unutilised gains can be parked in a special bank account for up to 2 years to claim the exemption.

Tax Deduction on Purchase of Immovable Property

When buying an immovable property in India, buyers must deduct 1% tax if the total sale consideration exceeds ₹50 lakh, as per Section 194IA of the Income Tax Act. Previously, there was ambiguity regarding the application of the ₹50 lakh threshold in cases with multiple buyers or sellers. It was unclear whether the threshold should be considered for each buyer’s/seller’s share or the property’s aggregate value.

To provide clarity, Section 194IA has been amended. Each buyer must now deduct 1% tax if their total payment for the property exceeds the ₹50 lakh threshold, regardless of the number of buyers/sellers or their respective shares. In essence, the amendment stipulates that the ₹50 lakh threshold applies to each buyer based on their individual payment amount, not the property’s aggregate value or the number of parties involved.

This clarification simplifies the tax deduction process for buyers, ensuring they are aware of their specific obligations based on their share of the property’s purchase price.

Impact on Home Buyers and Sellers

These changes could temporarily dampen sales velocity as homebuyers, particularly investors, may reconsider their decisions due to the removal of indexation benefits. However, the lower LTCG rate may incentivise short-term property investments if potential returns outweigh the loss of indexation.

For sellers, the effective tax rate will depend on factors like holding period and price appreciation. Those who sell a house and reinvest in a new one within 2 years will not be impacted, as they can offset past gains.

However, for investors in other assets or those not reinvesting, the changes could be significant. Analysts suggest that double-digit returns adjusted for inflation in real estate are unrealistic. The majority of buyers purchase properties for personal use, while only 15-20% buy for investment.

Tax Deduction on Rent Payments

Individuals and Hindu Undivided Families (HUF) must deduct 5% tax on rent payments exceeding ₹50,000 per month. This applies to any rent for land or buildings.

Deductions should be made in the last month of the year or tenancy.

To ease things, the Finance Minister has proposed reducing the tax rate from 5% to 2%.

In conclusion, the 2024 Budget has introduced sweeping changes to property taxation in India. While the government aims to simplify tax laws and curb avoidance, the impact on homeowners and investors will vary based on their specific circumstances.

Taxpayers should carefully evaluate their options and seek professional advice to navigate the new landscape. The government’s willingness to consider adjustments suggests an openness to feedback and a desire to strike a balance between fairness and promoting investment in the real estate sector.