The Budget 2024 significantly changed India’s Real Estate Taxation Rules in an unexpected move that purported to simplify the tax system (2024). And what has changed?
As per Budget 2024, declared on 23rd July 2024, the Long-Term capital gains (LTCG) tax has decreased from 20% to 12.5%. However, the indexation benefit has also been removed wherein the sale occurs after 23rd July 2024.
Thus, even if the tax rate dropped from 20% to 12.5%, the indexation advantage formerly granted on the proceeds from the property’s sale has also been eliminated. You will no longer be allowed to increase the purchase price of an old property you sell to lower the amount of capital gains that need to be taxed.
Although the government claims that most individuals will pay less in taxes as a result, the truth is that the benefits of this will vary depending on various circumstances, including the number of years, the sale price, and the value of the property.
Let us try to understand the calculation with different examples.
Assume four people bought a property at Rs 30 lakh in different years of 2003, 2008, 2013, and 2018 and sold the property in 2024.
Let’s examine the effects of the new regulation on the three distinct categories of property price growth rates throughout the various periods listed above. For the appreciation of real estate, we will estimate 5% in one scenario, 8% in the second, and 12% in another. These are the specific outcomes, which I will briefly discuss:
Assumptions for calculation:
| Purchase Year | 2003 | 2008 | 2013 | 2018 | |
| CII (Purchase Year) | 109 | 137 | 220 | 280 | |
| Year of Sale | 2024 | 2024 | 2024 | 2024 | |
| CII (Sale Year) | 363 | 363 | 363 | 363 | |
| Cost of Purchase | ₹ 30,00,000 | ₹ 30,00,000 | ₹ 30,00,000 | ₹ 30,00,000 |
Scenario No.1: Property prices are appreciated by 5%
| Property Appreciation | 5% | 5% | 5% | 5% | |
| Sale Value | ₹ 83,57,888 | ₹ 65,48,624 | ₹ 51,31,018 | ₹ 40,20,287 | |
| Indexed Cost of Property | ₹ 99,90,826 | ₹ 79,48,905 | ₹ 49,50,000 | ₹ 38,89,286 | |
| Capital Gain with Indexation | ₹ -16,32,937.92 | ₹ -14,00,281.34 | ₹ 1,81,018.07 | ₹ 1,31,001.21 | |
| Old | Tax @ 20% | No Tax | No Tax | ₹ 36,203.61 | ₹ 26,200.24 |
| Capital Gain without Indexation | ₹ 53,57,887.77 | ₹ 35,48,623.77 | ₹ 21,31,018.07 | ₹ 10,20,286.92 | |
| New | Tax @ 12.50% | ₹ 6,69,735.97 | ₹ 4,43,577.97 | ₹ 2,66,377.26 | ₹ 1,27,535.87 |
| Additional Burden | ₹6,69,735.97 | ₹4,43,577.97 | ₹2,30,173.64 | ₹1,01,335.62 | |
| (Due to cancellation of Indexation) |
Summary
A property was purchased for Rs 30 lakh in 2003. The owner holds the property till 2024 but unfortunately, he has got just 5% p.a. So he sells the property at Rs 83.58 lakh in 2024 after 21 years. Now the actual capital gain here is Rs 53.58 lakh (calculated as Rs 83.58 lakh – Rs 30 lakh). But as per the old taxation rule (20% with indexation), the purchase price of the property (Rs 30 lakh) can be inflation-adjusted.
So using the CII Numbers provided by the govt. in years of purchase and sale (109 in year-2003 and 363 in year-2024), the Indexed Cost of Property comes to Rs 99.90 lakh. Now if you notice, this indexed cost is more than the actual sale price. So as per the old tax rules, the person generates a capital loss of – Rs 16.32 lakh. Since there is a capital loss, no tax to be paid.
Let’s come to the new taxation rule (12.5% without indexation) scenario. Here, 12.5% tax is calculated on the actual gain on the deal, which is Rs 53.58 lakh (calculated as Rs 83.58 lakh – Rs 30 lakh). This comes to Rs 6.69 lakh which is the tax to be paid. So at least in this case, the seller is at a loss if he comes under the New Taxation Rule.
In Scenario No. 1, since capital appreciation is just 5% and the indexed cost of property is more or less the same as the sale value, the seller has to pay higher taxes due to the cancellation of indexation benefit.
Scenario No.2: Property prices are appreciated by 8%
| Property Appreciation | 8% | 8% | 8% | 8% | |
| Sale Value | ₹ 1,51,01,501 | ₹ 1,02,77,828 | ₹ 69,94,917 | ₹ 47,60,623 | |
| Indexed Cost of Property | ₹ 99,90,826 | ₹ 79,48,905 | ₹ 49,50,000 | ₹ 38,89,286 | |
| Capital Gain with Indexation | ₹ 51,10,675.46 | ₹ 23,28,922.82 | ₹ 20,44,916.99 | ₹ 8,71,337.25 | |
| Old | Tax @ 20% | ₹ 10,22,135.09 | ₹ 4,65,784.56 | ₹ 4,08,983.40 | ₹ 1,74,267.45 |
| Capital Gain without Indexation | ₹ 1,21,01,501.15 | ₹ 72,77,827.93 | ₹ 39,94,916.99 | ₹ 17,60,622.97 | |
| New | Tax @ 12.50% | ₹ 15,12,687.64 | ₹ 9,09,728.49 | ₹ 4,99,364.62 | ₹ 2,20,077.87 |
| Additional Burden of Tax | ₹4,90,552.55 | ₹4,43,943.93 | ₹90,381.23 | ₹45,810.42 | |
| (Due to cancellation of Indexation) |
In Scenario No. 2, though capital appreciation is 8% but sale value is not much higher than the indexed cost of the property. Hence, here in this case as well, the seller has to pay higher taxes.
Scenario No.3: Property prices are appreciated by 12%
| Property Appreciation | 12% | 12% | 12% | 12% | |
| Sale Value | ₹ 3,24,11,545 | ₹ 1,83,91,181 | ₹ 1,04,35,650 | ₹ 59,21,468 | |
| Indexed Cost of Property | ₹ 99,90,826 | ₹ 79,48,905 | ₹ 49,50,000 | ₹ 38,89,286 | |
| Capital Gain with Indexation | ₹ 2,24,20,719.11 | ₹ 1,04,42,275.84 | ₹ 54,85,649.98 | ₹ 20,32,182.34 | |
| Old | Tax @ 20% | ₹ 44,84,143.82 | ₹ 20,88,455.17 | ₹ 10,97,130.00 | ₹ 4,06,436.47 |
| Capital Gain without Indexation | ₹ 2,94,11,544.79 | ₹ 1,53,91,180.95 | ₹ 74,35,649.98 | ₹ 29,21,468.06 | |
| New | Tax @ 12.50% | ₹ 36,76,443.10 | ₹ 19,23,897.62 | ₹ 9,29,456.25 | ₹ 3,65,183.51 |
| Tax Saved | ₹8,07,700.72 | ₹1,64,557.55 | ₹1,67,673.75 | ₹41,252.96 |
In Scenario No. 3, you can see that the sale value is much higher (due to 12% appreciation) and the indexed cost is much lower, the seller will get the benefit of lower taxation despite the cancellation of the indexation benefit.
In short, this new rule of lower taxation and no indexation is good for only those investors whose property has appreciated by a good percentage. Therefore, you will not benefit from the new tax if your property values have increased slowly, by only a small percentage annually.
Also Read: Budget 2024: Effects of Change in Capital Gain Taxation on Your Market Investments