Last Updated on August 6, 2024 at 11:14 pm
Budget 2024 has revised the real estate taxation rule. Long term capital gains tax has been modified from 20% with indexation to 12.5% without indexation for any sale made on or after 23rd July 2024.
Update: Finance Bil 2024 has been amended. Taxpayers can now choose either 12.5% without indexation or 20% with indexation, whichever is lower for LTCG on property.
For those who wish to sell their old properties, this would mean a higher tax of a few lakhs! Let us see how this works using an example published earlier: My property sale capital gains tax is 50% lower thanks to indexation benefits.
Taxation as per the old rule (with indexation) The property in question was purchased in 1995. So, a property valuator was asked to determine the property value as of 1st April 2001 – the year cost inflation index was reset to 100. This value is Rs. 12 Lakhs.
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Suppose the current cost inflation index is 348. So, the indexed purchase price = 12 x 348/100 = 41.76 lakhs.
A similar indexation benefit is also applicable to any renovation costs on the property. For the moment, we will assume there are no renovation costs or expenses associated with the purchase. These would only reduce the tax to be paid.
The property was sold for Rs. 70 lakhs. So, the indexed capital gain is 70 minus 41.76 = Rs. 28.24 lakhs.
The income tax on this amount at the rate of 20% is Rs. 5,64,800
Add 4% Health and Education Cess = Rs. 22,592 (4% of 5,64,800)
So, the total tax to be paid when indexation is used is Rs. 5,87,392.
Now imagine if indexation benefits were not available and tax rate is 12.5%
Taxable capital gain is Rs. 70 lakhs minus Rs. 12 Lakhs* = Rs. 58 Lakhs. The total tax plus cess would then be Rs. 7.54 lakhs! So we need to pay Rs. 1.66 lakhs more! This can be much higher for older properties!
Note: I am told that it was clarified in the post-budget press conference that the valuation year will continue to remain as 2001. For properties purchased before 2001, the seller will have to choose the higher of the actual property price or fair value as of 2001 for taxation. Almost always the fair market value as of 2001 will be higher.