The Union Budget 2024, presented by Finance Minister Nirmala Sitharaman, announced several measures that could impact the common man's finances. Among other announcements, it revised the capital gains tax rates and changed the indexation benefits for various assets, including real estate. Those intending to sell their property will need to consider these changes carefully to understand their new tax liabilities before entering into any new financial deals.

Changes in Capital Gains Taxation

The Finance Minister stated that the budget aims to simplify capital gains taxation and announced the changes that would facilitate standardising the taxation treatment of long- and short-term gains from investments. Some of the key changes are as follows:  

Asset Classification: Listed financial assets held for more than a year will be classified as long-term, while unlisted financial assets and all non-financial assets must be held for at least two years to be classified as long-term.

Short-Term Gains: Short-term gains will be taxed at a rate of 20%, as opposed to 15% before.

Long-Term Gains: Long-term gains on all financial and non-financial assets, including property sales, will be taxed at a rate of 12.5%, which were previously taxed at 10%.

Exemption Limit: The exemption limit for capital gains on certain financial assets will be increased to Rs 1.25 lakh per year from Rs 1 lakh/year.

Indexation: Long-term gains will no longer be indexed.

What Is Indexation?

Indexation is the inflation-adjusted cost of an asset such as property, used for calculating real gains and computing effective tax. It factors inflation between the time of purchase and the time of sale, and accounts for the depreciating value of money over time due to inflation. This adjustment reduces the taxable amount of capital gains and, consequently, the tax liability. However, the budget has removed this indexation benefit for properties bought after 2001.

What Happens To Indexation After Budget 2024

From July 23, 2024, those selling their properties will no longer receive the indexation benefit and will have to pay a flat 12.5% tax on the difference between the selling price of the property and its original purchase price. Let’s understand this with an example.

Assume you purchased a flat in Mumbai 20 years ago for Rs 20 lakh and sold it for Rs 1 crore (factoring an 8-10% increase in property prices for Mumbai). The base year is taken as 2001-2002 and the cost inflation index (CII) for that year is 100, for 2004-05 it is 113, and the for 2024-25, it is 363.

The indexed cost of acquisition is calculated as follows:

(CII for the year of sale) x (cost of acquisition) / (CII for the year in which the asset was purchased)

In our example, the gain after indexation comes to Rs 35.75 lakh and the LTCG at 20% would be Rs 7.15 lakh. Without indexation, gains on the same sale is Rs 80 lakh. The LTCG at 12.5% on the sale comes to Rs 10 lakh. That’s an additional Rs 2.85 lakh in tax, or a 40% increase in the tax payable.

Let’s consider another example. A property was bought in 2012 for Rs 1 Cr and sold in 2024 for Rs 2.5 Cr. The indexed cost of acquisition will be Rs.1.97 Cr and the gains after indexation will be Rs 52.72 lakh. The LTCG at 20% will approximately be Rs 10.54 lakh. Following the budget revision, the LTCG on gains of Rs.1.5 Cr at the new rate of 12.5% would approximately be Rs 18.75 lakh. That’s an increase of approximately Rs.8.2 lakh, or an incredible 78%.

 

S. No

Purchase price

Year of Purchase

Selling Price

Cost of acquisition

Gains w/ Indexation

Gains w/o Indexation

LTCG tax

w/ Indexation

LTCG tax w/o  Indexation

Difference

% Increase

1

20,00,000

2004-05

1,00,00,000

64,24,779

35,75,221

80,00,000

7,15,044

10,00,000

2,84,956

40%

2

1,00,00,000

2011-12

2,50,00,000

1,97,28,261

52,71,739

1,50,00,000

10,54,348

18,75,000

8,20,652

78%

3

50,00,000

2018-19

75,00,000

64,82,143

10,17,857

25,00,000

2,03,571

3,12,500

1,08,929

54%

Other Repercussions

The usual way out to redeploy funds from sale of property without incurring LTCG tax is to invest the gains either in another property or in designated bonds.  The latter was possible because the adjusted gains were small enough to be invested in other instruments or used for other purposes such as funding a business or higher education.

For instance, in the previous example, only the gains after indexation of Rs 52.72 lakh need to be reinvested and the remaining Rs 2 crore can be used for other purposes. However, without indexation, you would now need to invest gains of Rs 1.5 crore and will be able to utilise only Rs 1 crore for other purposes. This also limits your opportunities to redeploy returns from investments in real estate.

Finally

The government has eliminated the indexation benefit but, at the same time, has lowered the taxation rate, too. In combination, this works well when property prices have risen at a very high rate of over 10% CAGR. In such situations, your LTCG tax liability without indexation may actually end up lower than the tax liability after indexation. However, in most common scenarios, you will have a much higher tax burden and fewer opportunities to redeploy your returns in a meaningful way.

The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.