What Is The Impact Of New Capital Gains Tax Laws On Property In 2024

In 2024, the Union Government of India made big real estate tax change on long-term capital gains (LTCG). These gains come from selling property. One of the biggest changes is the removal of the indexation benefit.

It let property owners adjust their purchase price for inflation. Instead, a new Long-term capital gains tax  rate of 12.5%+Cess and Surcharge will apply to the capital gains on property sales. It will not consider the indexation benefit. 

Note: Honourable FM and her panel assured that the benefit of indexation, which was available until 2001, would be safeguarded. This news relieves taxpayers because the new rules for capital gains announced in the Union Budget will start affecting them from July 23, 2024. 

New Update Regarding LTC Gains: The government is giving taxpayers a choice for property bought before July 23, 2024. You can choose to pay 12.5% tax without adjusting for inflation or 20% tax with inflation adjustment.

The same change applies to unlisted securities, where you can pay 10% tax if sold before July 23 and 12.5% if sold after. However, this lower tax rate only applies to property and unlisted securities, not to listed stocks or mutual funds. This change follows complaints about removing inflation adjustments from real estate taxes.

What Is Cost Inflation Index (CII)

The Income Tax Department publishes the Cost Inflation Index (CII) each year. It is used to calculate indexation benefits. It shows the inflation-adjusted cost of a long-term asset. This cost is then subtracted from the sale price to find the taxable gain. s 

The Central Board of Direct Taxes (CBDT) has set the CII for the financial year 2024-25. For the Assessment Year 2025-26, it is 363. The CII for the prior financial year 2023-24 (Assessment Year 2024-25) was 348.

What Is Indexation?

Indexation is the process of adjusting values, like wages or pensions, to keep pace with changes in prices or inflation. For instance, if your salary is indexed to inflation and prices rise by 2%, your salary would also increase by 2% to maintain its purchasing power. This helps people keep up with the cost of living over time.

Capital gains tax rates real estate and other listed and unlisted assets

New capital gains tax laws

Previous Rules

Under the old rules, owners could adjust their property's price. They used the Cost Inflation Index (CII). The Income Tax Department provided the CII. This change helped in accounting for inflation, thereby reducing the taxable capital gains.

For example, if Mr. A bought a property for Rs 25 lakh in 2002-2003 and sold it for Rs 1 crore in 2023-2024. The buy price would be adjusted using CII.

Calculation with Previous Rules

Consider the case of Mr. A, who purchased a property for 25 lakh rupees in the financial year 2002-2003 and sold it for 1 crore rupees in the financial year 2023-2024.

       •  The purchase price was 25 lakh rupees.
       •  The CII for 2002-2003 was 105.
       •  The CII for 2023-2024 was 348.

To calculate the inflation-adjusted purchase price, you multiply the purchase price by the CII for the sale year and then divide by the CII for the purchase year. In this example, the calculation would be:

25 lakh rupees multiplied by 348 divided by 105 equals approximately 82.86 lakh rupees. So, under the previous rules, the taxable capital gain would be the sale price minus the inflation-adjusted purchase price.

This calculation would be: 1 crore rupees minus 82.86 lakh rupees equals 17.14 lakh rupees. This amount would then be taxed at the LTCG rate of 20%.

New Rules

According to new capital gains tax laws. It will calculate capital gains. It does this by subtracting the purchase price from the sale price. It will not adjust for inflation. This means the taxable capital gain for Mr. A will be Rs 75 lakh (Rs 1 crore - Rs 25 lakh), and it will be taxed at a flat rate of 12.5%.

With the new rule in effect, the capital gains will be calculated by directly subtracting the purchase price from the sale price, without any inflation adjustment.

Calculation with New Rules

Using the same example, the calculation under the new rules is straightforward:

       •  The purchase price was 25 lakh rupees.
       •  The sale price was 1 crore rupees.

The taxable capital gain is simply the sale price minus the purchase price, resulting in 75 lakh rupees. This amount will be taxed at the new LTCG rate of 12.5%.

Expert Opinion: What Is The Impact Of New Capital Gains Tax Laws On Real Estate?

Some experts support this change. They state, "For real estate deals, lowering the long-term capital gains tax from 20% to 12.5% is a welcome step. Even though it comes with the removal of indexation benefits.

This will encourage more liquidity in property transactions. Investors have long asked for higher tax uniformity. They want it across different assets." 

Some experts have contrasting opinions on indexation. They state that the removal of indexation benefits will deter investors from the real estate sector, as this was one of the major reasons for investing in real estate.

This change will discourage sellers from selling their homes due to the new taxation policies, which they believe favor only the government. Consequently, this will slow down liquidity in the real estate market.

Government’s Philosophy: Real estate tax changes 2024

Honourable FM Nirmala Sitharaman in her 2024 budget speech, the finance minister explained why this change was made. She stated, "We will rationalize the rate to 12.5%. Also, indexation under the second proviso to section 48 will be removed.

This is used to calculate long-term capital gains for property. It also works for gold and other unlisted assets. This will make it easier to compute capital gains. It will help both the taxpayer and the tax administration."

Conclusion: Long-term capital gains tax 2024

According to this property taxation rules update for long-term capital gains on property have a 12.5% rate. To simplify tax calculations, the Government has removed indexation benefits. These changes aim for uniformity across asset classes.

The change may raise taxable gains. But, some experts think it will boost property liquidity and help investors in the long run and some say it will slow down the real estate market .