If you bought a property in or after 2001 and plan to sell it now, you may find yourself paying more tax, especially after the new proposals introduced on July 23, 2024. The 2024 Budget has reduced tax rates on long-term capital gains (LTCG) from the sale of house properties but has removed the indexation benefit previously available to taxpayers. The LTCG rate has been lowered from 20% with indexation to 12.5% without indexation for the real estate sector.
The indexation benefit allowed taxpayers to adjust the gains from selling a property for inflation, resulting in significant tax savings. This adjustment is no longer possible for properties bought after 2001, though the government has retained the indexation benefit for properties bought or inherited before 2001.
Budget 2024 aims to rationalize LTCG taxes across asset classes, aligning equity, debt, gold, and real estate under similar tax conditions. These changes took effect on July 23, 2024.
Tax experts suggest this shift may impact property sellers. “Real estate sellers benefited from inflation-adjusted indexation. Previously, a 20% LTCG would apply after considering the indexed cost of acquisition and improvement. Without indexation, the rate has increased from 10% to 12.5%,” they explain.
For example, if a property was purchased in FY 2019-20 for ₹1 crore and sold after five years in FY 24-25 for ₹1.25 crore, the indexed cost of acquisition would be ₹1.25 crore, resulting in NIL LTCG. However, from July 23, 2024, the LTCG would be 12.5% on ₹25 lakh, amounting to ₹3.12 lakh. Similarly, a property bought in FY 2009-10 for ₹1 crore and sold for ₹1.25 crore would incur the same LTCG of ₹3.12 lakh. “This amendment treats unequal taxpayers equally, which might not be the amendment’s intent,” the expert adds.
For home buyers, the new LTCG rates are tax-neutral. “While the government has removed indexation benefits, they retained the benefits under Section 54. This means homeowners can avoid paying any capital gains tax by reinvesting those gains in a new house,” experts note.
Also read: Budget 2024: Is the New Tax Regime Beneficial for Salaried Taxpayers?
Here are answers to some common questions property sellers may have:
How will the removal of indexation impact property owners wanting to sell their asset?
The removal of indexation from capital gains tax calculations will significantly impact sellers, depending on when the property was acquired.
Impact on sellers based on the year the property was acquired
- Property acquired in 2001: Sellers will experience a substantial increase in taxable capital gains due to the removal of indexation, as the lack of adjustment for nearly two decades of inflation results in a higher tax liability.
- Property acquired in 2010: Sellers will also face increased taxable capital gains, but the impact will be less severe than for properties acquired in 2001, given the shorter inflationary period.
- Property acquired in 2020: The impact will be minimal due to the short duration between purchase and sale, meaning the lack of indexation will add little to the tax burden. Sellers who bought property in 2020 will experience the least negative impact from the removal of indexation. This is not a financial advantage but rather a smaller increase in capital gains due to the short period between purchase and sale.
How will people planning to sell their parental property inherited in or after 2001 be impacted?
Individuals planning to sell inherited property (acquired from parents after 2000) will face higher tax liability. Succession planning should account for this increased tax cost when considering the timing and method of property transfer.
What should people planning to buy a second property for investment do now?
Individuals or Hindu Undivided Families can leverage Section 54 of the Income Tax Act, 1961, which allows for the deduction of the cost of purchasing or constructing a new residential property from the capital gains arising from the sale of a residential house. However, without indexation benefits, higher capital gains might require more funds to be invested in the new property to fully utilize the Section 54 deduction, capped at ₹10 crore.
What options are available for those channeling gains from shares into real estate?
Despite the removal of indexation, individuals and HUFs can invest in residential property to avail tax benefits on capital gains from the sale of non-residential assets (including shares) under Section 54F of the Income Tax Act, 1961. However, higher capital gains due to static acquisition costs mean a greater investment might be needed to leverage the full Section 54F deduction, capped at ₹10 crore.
What will be the impact on luxury properties worth more than ₹10 crore?
The government set a ₹10 crore ceiling for LTCG tax deduction for reinvestment in residential properties under Sections 54 and 54F in Budget 2023. The new system’s 12.5% rate plus surcharge and cess without indexation might be lower in some cases, such as properties purchased in 2001 and sold at significantly higher prices.
Will high-net-worth individuals invest abroad?
Real estate experts believe this may not entirely lead to an exodus of investments. The new tax incidence without indexation might still be lower in certain cases, making domestic investments more attractive for some high-net-worth individuals.
In summary, the 2024 Budget introduces significant changes to LTCG taxation, impacting property sellers based on when the property was acquired and its value.