Long-Term Capital Gains Tax Rules: Can Stamp Duty and Home Loan Interest Reduce LTCG Tax?

The Union Budget 2024 introduced significant changes to the taxation of long-term capital gains (LTCG) on the sale of immovable property. While the LTCG tax rate has been reduced from 20% to 12.5%, the removal of indexation benefits has impacted the overall tax liability. This article delves into the new rules and addresses a common query: Can stamp duty and home loan interest be added to the property cost to reduce the LTCG tax?  

Understanding the New LTCG Regime

Prior to the Budget, the LTCG on property was taxed at 20%, but taxpayers could avail of indexation benefits to adjust the purchase cost for inflation, thereby reducing the taxable gain. However, the new regime eliminates indexation, making the calculation of capital gains more straightforward but potentially leading to higher tax outgo.  

Can Stamp Duty and Home Loan Interest be Included in Property Cost?

The question of whether stamp duty and home loan interest can be added to the property cost to lower LTCG tax is relevant. Unfortunately, the answer is no.

• Stamp Duty: This is a government fee levied on the property transaction. While it is a significant expense incurred by the property owner, it is not considered part of the acquisition cost for LTCG calculation.  
• Home Loan Interest: Interest paid on a home loan is generally claimed as a deduction from taxable income under Section 24 of the Income Tax Act. However, it is not directly added to the property’s cost for LTCG purposes.  

Summary of Capital Gains Tax Changes

Effective Date

The new capital gains tax rules took effect on July 23, 2024, and apply to any asset sold on or after that date.

Holding Period Simplification

The government has streamlined the holding periods for capital assets:

• Listed securities now have a holding period of one year.
• All other assets have a holding period of two years.

This change primarily benefits investors in REITs and InVITs, as their holding period has been reduced from 36 to 12 months. Additionally, the holding period for gold and unlisted securities (except shares) has shortened from 36 to 24 months.

Immovable Property and Unlisted Shares

The holding period for immovable property and unlisted shares remains unchanged at 24 months.

Exemption Limit Increase

The exemption limit for long-term capital gains on qualifying assets has been raised from ₹1 lakh to ₹1.25 lakh for the financial year 2024-25 and beyond.

Here’s a summary of the key changes:

Simplified holding periods	There are now only two holding periods: one year and two years.
Increased LTCG tax on equities	Long-term capital gains tax (LTCG) on stocks, equity mutual funds, and business trusts has risen from 10% to 12.5%.
Uniform LTCG tax rate	LTCG on all other assets is now taxed at a flat 12.5%, but without the benefit of indexation.
Higher STCG tax on equities	Short-term capital gains (STCG) tax on stocks, equity mutual funds, and business trusts has increased from 15% to 20%.
No changes to roll-over benefits	Existing tax deferral options remain

Factors Affecting LTCG on Property

To accurately calculate LTCG on property sale, the following factors need to be considered:

• Purchase Price: The original cost of acquiring the property.
• Improvement Expenses: Any expenditure incurred on property improvements, such as renovation or construction.
• Indexation Benefit (for properties acquired before April 1, 2001): While this benefit has been removed for properties purchased after this date, it still applies to older properties.  
• Sale Consideration: The amount received from the property sale.
• Transaction Costs: Expenses like brokerage and legal fees can be deducted from the sale proceeds.  

Example

Let’s understand by an example of long term capital gains tax on property sale in the old and new tax regime. 

Scenario:

• Property purchased on April 1, 2010, for Rs. 50 lakh.
• Property sold on April 1, 2024, for Rs. 2 crore.
• Cost Inflation Index (CII) for FY 2010-11: 167
• Cost Inflation Index (CII) for FY 2024-25: Assume 334

Old Tax Regime

• Indexed Cost of Acquisition: Rs. 50 lakh * (334/167) = Rs. 1 crore
• Long-Term Capital Gain: Rs. 2 crore – Rs. 1 crore = Rs. 1 crore
• Taxable LTCG: Rs. 1 crore – Rs. 1 lakh (exemption limit) = Rs. 99 lakh
• Tax Liability: Rs. 99 lakh * 20% = Rs. 19.8 lakh

New Tax Regime

• No Indexation Benefit:
• Long-Term Capital Gain: Rs. 2 crore – Rs. 50 lakh = Rs. 1.5 crore
• Taxable LTCG: Rs. 1.5 crore – Rs. 1.25 lakh (increased exemption limit) = Rs. 1.38 crore
• Tax Liability: Rs. 1.38 crore * 12.5% = Rs. 17.25 lakh

Analysis

In this example, the taxpayer would have paid a higher tax under the old regime due to the benefit of indexation. However, the difference is not significant. The impact of the new regime would be more pronounced for properties held for longer durations with higher inflation during the holding period.

Strategies to Minimize LTCG on Property

Although stamp duty and home loan interest cannot be added to reduce LTCG, there are other ways to potentially minimize the tax liability:

• Long-Term Holding Period: To qualify for LTCG, the property must be held for more than 24 months. Maximizing the holding period can help in case of future property appreciation.  
• Property Improvement: Undertaking substantial improvements to the property can increase its cost base, thereby reducing the capital gain. However, the improvement should be significant and supported by proper documentation.
• Section 54 and 54F: Investing the capital gains in another residential property or specified bonds can provide relief under Sections 54 and 54F of the Income Tax Act. These sections offer exemptions or deferrals of LTCG tax under specific conditions.  

Conclusion

The removal of indexation benefits has undoubtedly increased the LTCG tax burden on property sales. While the inability to include stamp duty and home loan interest in the property cost is a setback, taxpayers can explore other avenues to mitigate the tax impact. Understanding the new LTCG regime and its implications is crucial for property owners to make informed decisions.

*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.