New LTCG Tax On Property Vs Old With Indexation: Which Is Better? Check Calculation Here

The new amendment in the property taxation allows taxpayers to choose between a 12.5% long-term capital gains (LTCG) tax rate without indexation or a 20% rate with indexation for properties acquired before July 23 this year.

Responding to industry demands, the government proposed an amendment to the Finance Bill 2024 on Tuesday, two weeks after presenting the Union Budget 2023. This amendment allows taxpayers to choose between a 12.5% long-term capital gains (LTCG) tax rate without indexation or a 20% rate with indexation for properties acquired before July 23 this year. On Wednesday, industry experts praised this decision, stating that the amendment to the LTCG tax on real estate transactions will provide greater flexibility for sellers.

Anuj Puri, Chairman – ANAROCK Group, said, "This change gives homeowners flexibility in their tax liabilities when they sell their property. For properties held over a long period, where inflation has majorly raised the property's value, opting for the 20% tax rate with indexation would be beneficial. Indexation adjusts the purchase price for inflation, potentially reducing the taxable gain and overall tax liability. For properties held for shorter periods or in low-inflation periods, the 12.5% rate sans indexation could be more beneficial and result in a lower tax burden."

Vishal Raheja, Founder & MD, InvestoXpert.com, said that the removal of indexation benefits on older properties significantly impacts long-term investors, particularly in mitigating the effects of inflation on capital gains. "For instance, a property purchased 20 years ago would now attract a considerably higher tax burden due to the unadjusted capital gains, leading to reduced disposable income for reinvestment or retirement planning. This change is likely to alter investment strategies, compelling investors to reassess their portfolios and possibly discouraging long-term holding of real estate assets. In the broader market, this could result in increased property sales as investors seek to liquidate assets before the impact fully takes hold, thereby influencing property prices and market dynamics in the short to medium term," said Raheja.

Check Property Tax Calculation: 12.5% vs 20%

Assume the following details as per Old Regime:

- Date of acquisition: January 1, 2005
- Date of sale: August 1, 2024
- Purchase price: Rs 10,00,000
- Sale price: Rs 50,00,000
- Cost Inflation Index (CII) for 2004-05: 113
- Cost Inflation Index (CII) for 2024-25: 348

Calculation:

1. Using the Old Scheme (20% with indexation)

Indexed Cost of Acquisition:
Indexed Cost = Purchase Price × (CII for 2024-25 / CII for 2004-05)
Indexed Cost = Rs 10,00,000 × (348 / 113)
Indexed Cost = Rs 10,00,000 × 3.08
Indexed Cost = Rs 30,80,000

Long-Term Capital Gain:
LTCG = Sale Price - Indexed Cost
LTCG = Rs 50,00,000 - Rs 30,80,000
LTCG = Rs 19,20,000

Tax on LTCG:
Tax = 20% × LTCG
Tax = 20% × Rs 19,20,000
Tax = Rs 3,84,000

2. Using the New Scheme (12.5% without indexation)

Long-Term Capital Gain:
LTCG = Sale Price - Purchase Price
LTCG = Rs 50,00,000 - Rs 10,00,000
LTCG = Rs 40,00,000

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

Conclusion:
- Tax under Old Scheme (20% with indexation): Rs 3,84,000
- 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 3,84,000) compared to the new scheme (Rs 5,00,000)

# Example with New Scheme

Let's assume the following details:
- Date of acquisition: January 1, 2015
- Date of sale: August 1, 2024
- Purchase price: Rs 10,00,000
- Sale price: Rs 50,00,000
- Cost Inflation Index (CII) for 2014-15: 240
- Cost Inflation Index (CII) for 2024-25: 348

Calculation:

1. Using the Old Scheme (20% with indexation)

Indexed Cost of Acquisition:
Indexed Cost = Purchase Price × (CII for 2024-25 / CII for 2014-15)
Indexed Cost = Rs 10,00,000 × (348 / 240)
Indexed Cost = Rs 10,00,000 × 1.45
Indexed Cost = Rs 14,50,000

Long-Term Capital Gain:
LTCG = Sale Price - Indexed Cost
LTCG = Rs 50,00,000 - Rs 14,50,000
LTCG = Rs 35,50,000

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

2. Using the New Scheme (12.5% without indexation)

Long-Term Capital Gain:
LTCG = Sale Price - Purchase Price
LTCG = Rs 50,00,000 - Rs 10,00,000
LTCG = Rs 40,00,000

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

Sunil Sisodiya, Founder, Geetanjali Homestate, said, "The removal of indexation benefits on older properties, while seemingly a drawback for long-term investors, may inadvertently lead to better returns in the real estate sector. This policy change could encourage homeowners to invest in property upgrades and renovations to maximize their returns, fostering overall sector growth and innovation."

As per ANAROCK Research, H1 2024 saw total sales of nearly 2.51 lakh units across the top 7 cities, 9% more than the same period last year (H1 2023). Given that Q2 2024 saw sales tapering due to the election heat and the increased prices across cities, the new tax imposed by the government in the budget was considered a dealbreaker for many. Now, with the government giving these options to the homebuyers, housing sales momentum will continue unimpeded.