Finance Minister’s plan to scrap the indexation benefit for LTCG . Get insights from an expert tax consultant.

Find out how the Finance Minister’s move to eliminate the indexation benefit for LTCG tax on real estate may reshape the sector. An expert tax consultant and udaipur ca  breaks down the potential effects and offers guidance for property investors.

The Finance Minister’s proposal to remove the indexation benefit for long-term capital gains (LTCG) tax on real estate may have significant effect in this sector.  The intention to simplify and rationalise the tax regime is well come step with the reduction in the LTCG tax rate to 12.5% from 20% but the removal of the indexation benefit could lead to a higher tax burden in this sector.  With this proposal more liquidity in property transactions will be available as well as uniformity in long term capital gains tax will be there across all types of assets.

Budget 2024 announced the removal of indexation benefit available on sale of property. Indexation is a method used to adjust the purchase price of an asset (like property) for inflation over the years. This adjusted price is then used to calculate capital gains, which is the profit made when you sell the asset. 

How does indexation work? Purchase price adjustment:

The government publishes a Cost Inflation Index every year, which is a measure to show how much prices have increased compared to the base year (2001-2002)   

Inflation-adjusted purchase price:

When any one sell the asset, then he multiply the original purchase price by the Cost Inflation Index of the year you it and divide it by the Cost Inflation Index of the year purchased it . This gives the inflation-adjusted purchase price.

How does this existing system work? 

For determining the current value of the property, a firstly s value as of April 1, 2001 was determined. Then this base value was multiplied by an index released annually by the Reserve Bank of India to account for inflation, resulting in the property’s “fair market value” for any year after 2000.

Long-term capital gains from selling property were taxed at 20% previously, but seller was always using indexation to reduce their taxable capital gain.  

The Budget 2024 has introduced following changes:

1. Proposed to the rationalisation of capital gain tax  rate to 12.5% from the 20%  and ,
2. Indexation available under second proviso to Section 48 is proposed to be removed for calculation of any long-term capital gains, which is presently available for property, gold and other unlisted assets. This is the big change and now adjustment of the purchase price for inflation will be not there. It means if any one purchased a property valued at Rs. 1,00,000 in 1980 and now he sells the property at Rs. 75,00,000 then the entire amount Rs. 74,00,000/- will be taxale to capital gain.

Examples

Old System (with indexation)

Mr.  X  Purchased a house for Rs 10 .00 lakh in FY 2001–2002 and sells in the year FY 2023-2024 for R. 1 crore.

To calculate the capital gains, the purchase price of Rs 10.00 lakh would be adjusted by using Cost Inflation Index for the respective years. This adjusted purchase price would then be subtracted from the sale price to determine the taxable capital gain.

New System (without indexation)

Mr. Y  bought the property for Rs 15 lakh in FY 2002-2003 and sold it for Rs 90 lacs e in FY 2023-2024. As the the new proposed rules, there’s no need to adjust the purchase price for inflation and the  the  capital gain would be  simply calculated by subtracting the original purchase price (Rs. 15  lakh) from the sale price (Rs. 90 lacs).

As per the Budget 2024 no adjustment of   cost inflation index is available, hence though the tax rate reduced but the higher taxable profit may result in higher tax amount compared to the old system. The Finance Minister’s plan to scrap the indexation benefit for LTCG tax on real estate could have significant implications. Hear from a Udaipur CA on what this could mean for investors and the real estate market.