In the 2024 budget, Finance Minister Nirmala Sitharaman announced that the indexation benefit for property sales would be removed. This implies that individuals selling their property will no longer be able to adjust their purchase price using inflation, thereby reducing their capital gains. This results in an increased tax liability for individuals planning to sell their property soon.
Before the announcement, long-term capital gains (LTCG) from property sales were taxed at 20% with indexation benefits. According to the Budget documents, the new tax rate for long-term capital gains on property sales will be 12.5% without indexation benefit.
The news about removing the indexation benefit for property sales was disappointing, despite the Finance Minister's announcement of a lower LTCG tax rate. The impact of this change on higher tax obligations when selling property can be illustrated with the following example.
Hiren Thakkar, Chartered Accountant Proprietor, Hiren S Thakkar & Associates shared, “This is indeed not good news for those looking to profit from their real estate investments. Let’s see that you bought a property for ₹50 lakhs some years back. You have found a reliable buyer willing to pay you ₹70 lakhs for the property. Under the previous taxation rules, taxpayers could adjust the purchase price using the Cost Inflation Index (CII) numbers specified by the Income Tax Department. With the new rule coming into effect, there will no longer be a requirement to adjust the purchase price for inflation. Taxpayers will now calculate capital gains by deducting the actual purchase price from the sale price directly.
The LTCG tax liability under both the old and new tax rules will unfold as follows:
Purchase price: ₹50 lakhs
Adjusted purchase price using CII: ₹64,82,000
Sale price (2024-25): ₹70 lakhs
Gain: ₹5,18,000
Tax liability under old LTCG rules: ₹1,03,600
Purchase price: ₹50 lakhs
Sale price (2024-25): ₹70 lakhs
Gain: ₹20 lakhs
Tax liability under new LTCG rules: ₹2,50,000
The tax liability sans the benefit of CII benefit would go higher, thus, increasing the net tax liability of taxpayers in the coming year.”
For those unfamiliar, the indexation benefit reduces the taxable capital gain on a long-term capital asset by adjusting the purchase price for inflation using the CII. This index, released annually by the Income Tax Department, tracks the inflation changes over time. Utilizing the inflation-adjusted cost reduces the taxable capital gain, potentially resulting in lower taxes paid. The indexation benefit applies only to certain assets, with property previously included until it was removed in Budget 2024.
