On 23rd July 2024, Finance Minister, Nirmala Sitharaman ji in the Union Budget 2024-25,
"Removed indexation benefits and reduced Long Term Capital Gains tax from 20% to 12.5% on sale of property"
It was also discussed in Rajya Sabha that the government's decision to remove indexation benefit on sale of old property will result in huge inflow of black money in real estate and investments in the sector will go down, people will never be able to buy their "dream homes. Asked the government to roll back the proposal in the discussion on the Union Budget 2024-25
Post discussions, the final captial gains Tax on Real Estate Investment
Long-Term Capital Gains (LTCG)
This applies if you sell a property after holding it for more than 24 months. The tax rules for LTCG are as follows:
- For Property Acquired before July 23, 2024: You have the option to choose the lower of the two following tax calculations :
- 20% with the benefit of indexation. Indexation allows you to adjust the purchase price of the property for inflation, which can significantly lower your taxable profit.
- 12.5% without the benefit of indexation. This is a flat rate on the total profit.
- For Property Acquired on or after July 23, 2024:
- You will be taxed at a flat rate of 12.5% without any indexation benefit.
Short-Term Capital Gains (STCG)
This applies if you sell a property within 24 months of acquiring it.
- The profit from the sale is added to your total income and taxed at your applicable income tax slab rates
For properties acquired before 23rd Jul, 2024, which taxation is better?
let us do some math. Let us say Mr.X bought a Land in 2014 for Rs. 10 Lacs and it has grown by 8% CAGR, i.e. current value of the land would be Rs. 10 Lacs *(1.08)^10 years = Rs. 21.6 Lacs. Let us find out how much Mr.X has to pay in both cases.
Capital Gains tax with Indexation benefit (Old) :
Assuming inflation to be 6%, Indexation value of the plot is 10Lcas * (1.06)^10 = 17.9 Lacs.
Long Term Capital gains would be current value minus Indexation value i.e. 21.6-17.9 = Rs. 3.7 Lacs.
Tax would be 20% of Rs. 3.7 Lacs. i.e. Rs. 0.74 Lacs (~Rs. 74,000)
Capital Gains tax without Indexation benefit (New) :
Long Term Capital Gains would be Rs. 21.6-10 = Rs. 11.6 Lacs.
Tax would be 12.5% of Rs. 11.6 Lacs. i.e. Rs. 1.45 Lacs
In this case, Capital Gains tax with indexation benefit is the clear winner for Investors which can save close to Rs. 71,000 in tax (difference in the tax, i.e. Rs. 1.45 Lacs - 0.74 Lacs).
But is it true in all cases?
Lets find out with the same example of buying a land for 10years before with Rs. 10 Lacs, if the land grows with different CAGRs ranging from 6% - 20%, how much would one have to pay LTCG as per Indexation and without indexation taxations in the below Table
| CAGR | With Indexation Benefit | Without Indexation Benefit |
| 6% | ₹0 | ₹9,886 |
| 7% | ₹3,526 | ₹12,089 |
| 8% | ₹7,362 | ₹14,487 |
| 9% | ₹11,530 | ₹17,092 |
| 10% | ₹16,058 | ₹19,922 |
| 11% | ₹20,971 | ₹22,993 |
| 12% | ₹26,300 | ₹26,323 |
| 13% | ₹32,074 | ₹29,932 |
| 14% | ₹38,327 | ₹33,840 |
| 15% | ₹45,094 | ₹38,069 |
| 16% | ₹52,412 | ₹42,643 |
| 17% | ₹60,320 | ₹47,585 |
| 18% | ₹68,860 | ₹52,923 |
| 19% | ₹78,077 | ₹58,684 |
| 20% | ₹88,018 | ₹64,897 |
From the above table. If the property one purchases grows annually with more than 12% then New taxation (without indexation benefit) is better else Old taxation (with indexation benefit) is better. One may check the historical growth rate in that particular city/area and see which is better.
If one were to purchase a property with a bank loan, Loan interest rate will anyways be more than 8% it doesn't make sense to purchase a property having returns less than 8%. So if one purchases with a property with expected returns more than 8%. So you can check if New taxation is better or not.
Please do comment if you have any queries. Share it with your friends and relatives if this helps them.
Regards,
Honvest Team.
Indexation Benefit removal on Long Term Capital Gains