Union Budget 2024: No Indexation Benefit for Property Sale

In the latest Budget 2024 announcement, a significant change has been proposed that affects how we calculate long-term capital gains on property, gold, and other unlisted assets. The Finance Bill, presented in Parliament on Tuesday, suggests removing the indexation benefit that is currently available for these assets.

Simplifying Capital Gains Computation

The government states that this move aims to “ease computation of capital gains for the taxpayer and the tax administration.” However, this change implies that individuals who have held real estate or gold for extended periods might face higher tax liabilities. 

Understanding Indexation

Indexation is a method used to adjust the purchase price of an asset to account for inflation, thereby reducing the taxable capital gains. Previously, long-term capital gains on non-financial assets like property and gold were taxed at 20% with the benefit of indexation.

Starting from July 23, Finance Minister Nirmala Sitharaman has announced a hike in taxes on long-term capital gains on both financial and non-financial assets, increasing from the current 10% to 12.5%. However, there’s a bit of relief for some financial assets, as the exemption limit for capital gains has been raised from Rs 1 lakh to Rs 1.25 lakh per year.

Impact on Real Estate Transactions

One notable aspect of the new rule is the reduction in the long-term capital gains tax rate for real estate transactions from 20% to 12.5%, even though this comes with the removal of indexation benefits. This change is seen as a positive step, as it is expected to encourage more liquidity in property transactions and create uniformity in the long-term capital gains tax across different asset classes – a longstanding request from investors.

Example Scenario

To understand the impact of this change, let’s consider an example:

Mr. XYZ purchased a property for Rs 35 lakh in the financial year 2002-2003 and sold it for Rs 1 crore in the financial year 2023-24. Under the old rules, the purchase price of Rs 35 lakh would be adjusted using the Cost Inflation Index (CII) provided by the Income Tax Department. This adjustment significantly reduces the taxable capital gains by accounting for inflation.

However, with the new rule in effect, the capital gains will be calculated directly by subtracting the purchase price from the sale price, without any adjustment for inflation. This means Mr. XYZ’s taxable capital gains would be Rs 65 lakh (Rs 1 crore – Rs 35 lakh), potentially resulting in a higher tax liability compared to the previous method.

Conclusion

The proposed changes in the Budget 2024 will streamline the process of calculating capital gains, but they may also lead to higher tax payments for those holding assets like real estate and gold over the long term. While the reduction in the long-term capital gains tax rate for real estate is a positive move, the removal of indexation benefits will be a critical factor for taxpayers to consider. Investors should review their portfolios and consider these changes while planning their future transactions.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.