Budget 2024: New 12.5% LTCG Tax on Property Sales from 2001 Onwards
News Mania Desk/Agnibeena Ghosh/24th July 2024
In Budget 2024, the Indian government has introduced a 12.5% long-term capital gains (LTCG) tax on properties purchased from 2001 onwards. This change marks the removal of the indexation benefit, which previously allowed property owners to adjust the value of their assets to current market conditions, thereby reducing their taxable gains. This alteration could increase the tax burden for property owners unless they reinvest in new properties, which can still exempt them from paying the LTCG tax.
Mehul Bheda, a Partner at Dhruva Advisors, highlighted the mixed impact of this change. He noted that while the LTCG tax rate reduction to 12.5% and the eligibility period for long-term assets being shortened to two years are positive reforms, the removal of indexation poses a significant drawback.
Indexation is a method that adjusts the purchase price of an asset to account for inflation over time. The government publishes the Cost Inflation Index (CII) each year to measure price rises relative to a base year (2001-2002). To calculate the inflation-adjusted purchase price, the original purchase price is multiplied by the CII of the sale year and divided by the CII of the purchase year, providing an adjusted purchase price that reflects inflation.
Previously, long-term capital gains from property sales were taxed at 20%, with the indexation benefit allowing sellers to reduce their taxable profit. However, the new budget removes this benefit. The budget document states, “With the new rate rationalized to 12.5%, the indexation provided under the second proviso to Section 48 will no longer apply when calculating long-term capital gains.”
Finance Minister Nirmala Sitharaman explained that these changes aim to simplify the calculation of capital gains for both taxpayers and tax administrators. While the new LTCG tax rate is lower, experts indicate that it may lead to higher taxes due to the elimination of indexation. Without indexation, taxes are calculated based on the original purchase price without adjusting for inflation, potentially resulting in a higher taxable capital gain despite the lower tax rate.
CLSA, a brokerage firm, illustrated this with an example. If you purchased a property for Rs 5 crore, the indexed cost of acquisition under the old system would be adjusted using the government’s CII. Comparing this with the new system, which excludes indexation, shows that the LTCG tax burden is higher for properties held for less than ten years with moderate price appreciation (less than 10% per annum). However, for properties held for over ten years with robust price appreciation (over 10% per annum), the new LTCG tax could be neutral or slightly beneficial.
The Ministry of Finance has emphasized that this change aims to benefit the middle class by streamlining the tax approach. Sitharaman stated, “We wanted to simplify the approach to taxation, especially for capital gains. The average taxation has come down. When we say it is 12.5%, it is because we have calculated it for each of the different classes. We have brought it down to 12.5%, which is the lowest in several years, encouraging investment in the market.”
Budget 2024’s new LTCG tax structure seeks to balance the need for simplified taxation with the aim of promoting market investment, although it may pose challenges for property owners due to the removal of indexation benefits.
