Changes in LTCG Tax on Real Estate Sales: Budget 2024

The long-term capital gains (LTCG) tax on real estate sales has undergone considerable modifications as a result of the Budget 2024. The removal of the indexation benefits for real estate sales is one of the major modifications. We will go into more depth about this shift and how it affects investors and property owners in this blog.

What is the Benefit of Indexation?

Property owners can lower their taxable profits by adjusting their purchase price for inflation through the indexation advantage, which is a tax benefit. This implies that you might lower your taxable profit by adjusting the purchase price for inflation if you bought a property for Rs. 10 lakhs in 2010 and sold it for Rs. 20 lakhs in 2020.

The Cost Inflation Index (CII), which is published annually by the Central Government, is used to compute the indexation benefit. An asset's purchase price can be adjusted for inflation using the Consumer Price Index (CII).

How Did Indexation Benefit Work?

Let's look at an example to better understand how the benefit of indexation operated. Let's say you paid Rs. 10 lakhs for a home in 2010 and sold it for Rs. 20 lakhs in 2020. You would first need to use the CII to adjust the purchase price for inflation before you could figure out the taxable profit.

Given a CII of 100 for 2010 and a CII of 200 for 2020, the modified purchasing price would be:

Original Purchase Price x (CII for 2020 / CII for 2010) = Rs. 10 lakhs x (200 / 100) = Rs. 20 lakhs is the adjusted purchase price.

There would be no tax burden since there would be no taxable profit because the adjusted purchase price is equal to the sale price.

What's Been Modified?

The property sales indexation bonus was removed in the Budget 2024. As a result, property owners won't be able to factor inflation into the purchase price. The loss of indexation benefit cannot be made up for by the lowering in the tax rate for long-term capital gains (LTCG) to 12.5%.

Effects of Removing the Indexation Benefit

Property owners will be required to pay taxes on the full profit on the sale of a property, without any inflation adjustments, due to the elimination of the indexation benefit. Property owners may see a large increase in their tax obligations as a result of this.

Taxable Profit is equal to the sale price less the original purchase price, or Rs. 20 lakhs less Rs. 10 lakhs.

Your tax obligation at a 12.5% tax rate would be:

Tax Liability is equal to Taxable Profit x Tax Rate, which comes to Rs. 1.25 lakhs from 10 lakhs x 12.5%.

Effect on the Market for Real Estate

The real estate market is anticipated to be significantly impacted by the removal of the indexation benefit. Stakeholders in real estate are worried that the tax adjustments may make real estate less desirable as an investment than other alternatives. This might result in less demand for real estate, which would raise the cost of real estate.

Other Affected Assets

The elimination of the indexation benefit affects sales of real estate as well as other unlisted assets.

In summary

A big change that can have a big effect on investors and property owners is the removal of the indexation benefit for real estate sales. Even if the tax rate has been lowered to 12.5%, the removal of the indexation benefit may result in a larger tax burden than under the previous arrangement. Investors and property owners must comprehend the effects of these shifts and make plans appropriately.

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