One of the big tax changes in Budget 2024 is the removal of indexation benefits for non-financial assets like property. As a result, many are worried that selling property will result in significant long term capital gains tax. However, this may not be true in all cases. In this article, we'll break down how this change will affect the taxes you owe when you sell a property.
What is Indexation benefit?
Indexation is a method used to adjust the purchase price of an asset to reflect the effect of inflation. This adjustment helps in reducing the tax liability on capital gains by accounting for inflation over the holding period of your asset.
Tax treatment of real-estate assets: Current vs Proposed
Currently, LTCG on non-financial assets such as property are taxed at 20% after adjusting for indexation. However, Budget 2024 proposes a change, lowering the LTCG tax rate to 12.5% for both financial and non-financial assets.
With this adjustment in LTCG rate, the Budget also proposes removing the indexation benefit under the second proviso to Section 48 for calculating any LTCG. However, indexation benefits will still apply to properties purchased before 2001.
Impact of removal of indexation benefit on sale of property
Currently, the indexation benefit lets you adjust the purchase price of your property using the Cost Inflation Index (CII) set by the government. This adjustment reduces your capital gains and results in tax savings. However, with the removal of indexation benefits, your tax liability may or may not increase, and it depends on the holding period and the price appreciation of your property.
Let's explore how the removal of indexation affects tax liability on the sale of property with an illustration, assuming you purchased a property for Rs 1 crore, and its value appreciates by 10% annually. As seen in the table below, your LTCG tax increases for 5 and 20-year periods due to the removal of indexation in the new regime compared to the old regime. However, the LTCG tax is lower for a 10-year holding period, suggesting that the impact varies on a case-by-case basis.
|
Old regime |
New regime |
| Holding period (Years) |
5 Years |
10 Years |
20 Years |
5 Years |
10 Years |
20 Years |
| Cost of acquisition (₹ Cr) |
1.00 |
1.00 |
1.00 |
1.00 |
1.00 |
1.00 |
| Indexed cost of acquisition (₹ Cr) |
1.26 |
1.51 |
3.21 |
1.00 |
1.00 |
1.00 |
| Tax rate (%) |
20% |
20% |
20% |
12.5% |
12.5% |
12.5% |
| Market value assuming 10% CAGR growth (₹ Cr) |
1.61 |
2.59 |
6.73 |
1.61 |
2.59 |
6.73 |
| LT capital gains (₹ Cr) |
0.35 |
1.08 |
3.52 |
0.61 |
1.59 |
5.73 |
| LTCG tax (₹ Cr) |
0.07 |
0.22 |
0.70 |
0.08 |
0.20 |
0.72 |
| Change in LTCG tax: Old vs New regime |
|
|
|
Increased |
Decreased |
Increased |
For illustration purpose only. Indexed cost of acquisition in old regime is based on the government’s cost inflation index (CII)
How to avoid paying tax on capital gains?
You can avoid paying tax on LTCG on sale of property by reinvesting your capital gains in another property within a stipulated time period under Section 54. You may also invest in capital gains bonds (under Section 54EC) issued by government-backed organizations to save tax on capital gains.
Summing up
The tax impact of removing the indexation benefit on property sales varies from case to case. It’s important to note that this change is unlikely to affect those selling their current home to buy a new one. However, it will impact investors who are selling property investments to reinvest in other asset classes.
The tax changes proposed in Budget 2024 will be effective from July 23, 2024, so it’s essential for taxpayers to stay informed and adjust their investment strategies accordingly. Keep in mind that these changes are proposals and will only take effect once the Finance Bill is approved by Parliament.
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Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision
