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The Budget 2024 has brought a significant change in the taxation of property sales, delivering a major tax blow to property sellers. The Finance Minister announced the removal of the indexation benefit available on the sale of property. This change will impact the way long-term capital gains (LTCG) are calculated and taxed.
Previously, the long-term capital gains from the sale of property were taxed at 20% with the benefit of indexation. This allowed sellers to adjust the purchase price of the property for inflation, thereby reducing the taxable capital gains.
From now on, the indexation benefit will no longer be available. Sellers will have to calculate capital gains by simply subtracting the purchase price from the sale price.
A new LTCG tax rate of 12.5% has been introduced, applicable without the indexation benefit.
Example for Better Understanding
Consider Mr. A who bought a property for Rs 25 lakh in FY 2002-2003 and sold it in FY 2023-2024 for Rs 1 crore. Under the old rules, Mr. A would inflate the purchase price using the Cost Inflation Index (CII) provided by the Income Tax Department, reducing his taxable capital gains. With the new rules, the capital gains will be calculated directly by subtracting the purchase price from the sale price, without any inflation adjustment.
"Simultaneously with rationalisation of rate to 12.5%, indexation available under the 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 will ease the computation of capital gains for the taxpayer and the tax administration."
The CII is published annually by the Income Tax Department to calculate the inflation-adjusted cost of long-term capital assets. It adjusts the purchase price of the asset to account for inflation, reducing the taxable capital gain.
For FY 2024-25 (AY 2025-26), the Central Board of Direct Taxes (CBDT) has notified the CII as 363. For FY 2023-24 (AY 2024-25), the CII was 348. These indices were used to determine the inflation-adjusted purchase price of assets sold within those fiscal years.
This change simplifies the computation of capital gains but removes a significant tax-saving mechanism. Sellers of properties, gold, and other unlisted assets will need to reconsider their tax planning strategies in light of these new rules.
Stay updated with these significant tax changes and adjust your financial planning accordingly.
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