Budget 2024: How removal of indexation benefits impacts property tax – Comparison of pre-2001 and post-2001 purchases

In the Union Budget 2024, the removal of the indexation benefit on property transactions has led to significant changes in the calculation of long-term capital gains (LTCG). However, the government has clarified that the indexation benefit will remain available for properties bought or inherited before 2001, even though the LTCG tax rate has been reduced from 20% to 12.5%.

As the government has clarified that properties bought before 2001 will still get indexation benefits on sale, here is an illustration taking two scenarios – pre-2001 purchase and post-2001 property purchase.

Also read: What is indexation in property sale and how is it calculated? What has changed after Budget 2024?

Scenario 1: Property Bought in 1999

For property bought before 2001, the indexation benefit is available, as per new changes in the LTCG structure.

Calculation of Long-Term Capital Gains (LTCG) with Indexation

Let’s assume the Cost Inflation Index (CII) for the year of sale (2024) is 348 and for the year 1999 is 100.

Indexed cost of acquisition = Purchase value * (CII for 2024 / CII for 1999)

Indexed cost of acquisition = ₹10,00,000 * (348 / 100) = ₹34,80,000

LTCG Calculation:

LTCG = Current property value – Indexed cost of acquisition

LTCG = ₹1,00,00,000 – ₹34,80,000 = ₹65,20,000

Tax Calculation:

Tax rate = 12.5%

Tax = 12.5% of ₹65,20,000 = ₹8,15,000

Long-Term Capital Gains Tax payable: ₹8,15,000

Scenario 2: Property Bought in 2003

Calculation of Long-Term Capital Gains (LTCG) without Indexation

For property bought after 2001, the indexation benefit is not available.

Cost of acquisition = ₹10,00,000

LTCG Calculation:

LTCG = Current property value – Cost of acquisition

LTCG = ₹1,00,00,000 – ₹10,00,000 = ₹90,00,000

Tax Calculation:

Tax rate = 12.5%

Tax = 12.5% of ₹90,00,000 = ₹11,25,000

Long-Term Capital Gains payable: ₹11,25,500

To summarise the both scenarios, the tax payable on the sale of a property bought in 1999, benefiting from indexation, is ₹8,15,000. The tax payable on the sale of a property bought in 2003, without indexation, is ₹11,25,000.

Justifying the indexation removal move, meanwhile, the Income Tax Department in one of the posts on social media handle ‘X’ said, “Nominal real estate returns are generally in the region of 12-16 per cent per annum, much higher than inflation. The indexation for inflation is in the region of 4-5 per cent, depending on the period of holding. Therefore, substantial tax savings are expected to a vast majority of such tax payers.”