The amendment in Finance Bill relating to LTCG tax on real estate transactions has restored the indexation benefit on properties acquired before July 23, 2024. This amendment has ensured that individuals and Hindu Undivided Families (HUFs) who bought residential or commercial real estates before July 23, the day the Union Budget was presented, can choose either of the two options – 12.5% tax on long-term capital gains (LTCG) on property sale without indexation benefits or 20% LTCG tax with indexation benefit.

After this revision in LTCG tax on property transaction through a Finance Bill amendment, Finance Minister Nirmala Sitharaman said the relaxing of LTCG tax on property transaction proves that the government is doing everything to meet common man’s expectations.

Replying to a debate on Finance Bill (No.2), 2024 in the Lok Sabha on Wednesday, the FM said the government has eased tax burden on small taxpayers and middle-class as well as taken steps to further simplify the tax regime.

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With this, taxpayers have now two options to compute their taxes on long term capital gains (LTCG). So which is beneficial for you – 12.55 tax rate without indexation or 20% with indexation. Let’s understand through calculations which LTCG regime (old or new) is better for you. Here we will take two scenarios with two different property acquisition dates of January 1, 2002 and January 1, 2024 and calculate taxes comparing both LTCG regimes.

Scenario 1: Date of property acquisition in 2002

Details:

Date of acquisition: January 1, 2002

Date of sale: August 1, 2024

Purchase price: Rs 10,00,000

Sale price: Rs 50,00,000

Cost Inflation Index (CII) for 2002: 105

Cost Inflation Index (CII) for 2024-25: 348

Calculation:

Using the Old Scheme (20% with indexation)

Indexed Cost of Acquisition:

Indexed Cost = Purchase Price×(CII for 2002/CII for 2024-25)

Indexed Cost = 10,00,000×(105/348)

Indexed Cost = 10,00,000×3.314

Indexed Cost = Rs 33,14,286

Long-Term Capital Gain: Sale Price−Indexed Cost

LTCG = 50,00,000−33,14,286 = Rs 16,85,714

Tax on LTCG: 20% of 16,85,714 = Rs 3,37,143

Using the New Scheme – (12.5% without indexation)

Long-Term Capital Gain: Sale Price−Purchase Price

LTCG = 50,00,000−10,00,000 = Rs 40,00,000

Tax on LTCG: 12.5% of 40,00,000 = Rs 5,00,000

Conclusion:

Tax under Old Scheme (20% with indexation): Rs 3,37,143

Tax under New Scheme (12.5% without indexation): Rs 5,00,000

In this example, the old scheme with indexation is more beneficial because the tax payable is lower under the old scheme (Rs 3,37,143) compared to the new scheme (Rs 5,00,000).

Scenario 2: Date of acquisition in 2014

Details:

Date of acquisition: January 1, 2014

Date of sale: August 1, 2024

Purchase price: Rs 10,00,000

Sale price: Rs 50,00,000

Cost Inflation Index (CII) for 2014: 240

Cost Inflation Index (CII) for 2024-25: 348

Calculation:

Using the Old Scheme (20% with indexation)

Indexed Cost of Acquisition:

Indexed Cost = Purchase Price×(CII for 2014/CII for 2024-25)

Indexed Cost = 10,00,000×(240/348)

Indexed Cost = 10,00,000×1.45 = Rs 14,50,000

Long-Term Capital Gain: Sale Price−Indexed Cost

LTCG = 50,00,000−14,50,000 = Rs 35,50,000

Tax on LTCG: 20% of 35,50,000 = Rs 7,10,000

Using the New Scheme (12.5% without indexation)

Long-Term Capital Gain: Sale Price−Purchase Price

LTCG = 50,00,000−10,00,000 = Rs 40,00,000

Tax on LTCG: 12.5%×40,00,000 = Rs 5,00,000

Conclusion:

Tax under Old Scheme (20% with indexation): Rs 7,10,000

Tax under New Scheme (12.5% without indexation): Rs 5,00,000

In this example, the new scheme without indexation is more beneficial because the tax payable is lower under the new scheme (Rs 5,00,000) compared to the old scheme (Rs 7,10,000).

In the Union Budget 2024-25, presented on July 23 last month, Sitharaman announced changes in LTCG tax rate on real estate and exemption limit. She lowered the LTCG tax rate to 12.5% without indexation from 20% without the indexation benefit. Also, the FM announced enhancing the LTCG exemption limit on sale of most assets, including real assets, to Rs 1.25 lakh from Rs 1 lakh for tax computation purpose. However, the removal of indexation benefit led to the government facing severe criticism particularly from the middle class.

In her reply in Parliament on the Finance Bill debate, Sitharaman said the change in LTCG tax rate was not a revenue generating exercise or “greed” but an attempt to bring about parity among similar asset classes. The change gives a “fairer option and a choice to the property holder”, she added.