Budget 2024: Proposed LTCG tax changes on property sales explained

Holding period, quantum of gain to decide if new norms are beneficial

The Union Budget on Tuesday proposed to change the long-term capital gains (LTCG) tax rate on the sale of property. Earlier, the rate was 20 per cent with indexation benefit. The Budget prosed a rate of 12.5 per cent without indexation benefit.

The short-term capital gains tax rate (STCG) remains unchanged: the gain is added to the taxpayer’s income and taxed at the applicable slab rate. The holding period for determining whether the gain is long- or short-term remains unchanged at 24 months.

Experts say the proposed LTCG tax norms could be advantageous or disadvantageous to those who sell real estate, depending on the situation.  

Positive scenario

Consider a case of a buyer who bought a property in FY2001-02 for Rs 10 lakh and sold it in FY 2024-25 for Rs 1 crore. Under the earlier regime, her indexed cost of acquisition (with an assumed cost inflation index for FY2024-25) would be Rs 36.5 lakh and the capital gain would be Rs 63.5 lakh. Her tax bill at the rate of 20 per cent would be Rs 12.7 lakh.

With the proposed change, the acquisition cost remains Rs 10 lakh and the capital gain now rises to Rs 90 lakh. At the rate of 12.5 per cent, the tax bill comes to Rs 11.25 lakh, lower than the Rs 12.7 lakh under the earlier tax norms.

“In the case of very old properties, which have a low acquisition cost, even inflation indexing would not change the acquisition cost too much. In such cases, the seller would pay less under the proposed tax norms,” says Arnav Pandya, founder, Moneyeduschool.

Negative scenario

Consider another scenario where a person purchases a property for Rs 75 lakh in FY2021-22 and sells it for Rs 1 crore in FY2024-25.

Under the old norms, the purchase price of Rs 75 lakh would become Rs 86.36 on indexation (cost inflation index for FY2024-25 assumed). The LTCG would be Rs 13.64 lakh. At the tax rate of 20 per cent, the tax bill would be Rs 2.73 lakh.

Under the proposed norms, the acquisition cost remains Rs 75 lakh. The capital gain is Rs 25 lakh. Applying the tax rate of 12.5 per cent, the tax bill comes to Rs 3.12 lakh, higher than the tax bill of Rs 2.73 lakh under the old norms.

“As the time-period between the acquisition and transfer of property goes down, the proposed taxation norm may be detrimental,” says Yogesh Kale, executive director, Nangia Andersen LLP. He adds the caveat that the actual outcome would depend on a variety of factors: market value of real estate in a particular area, the actual inflation, and inflation-adjusted returns.

The proposed norms would be disadvantageous in one more situation. “Under the proposed taxation, one may have to pay tax even if the inflation-adjusted returns from the transfer of property are negative,” says Kale. Earlier, the seller would not have paid any tax but now he would have to pay tax at 12.5 per cent on whatever is the capital gain.

Experts say the taxation impact will depend upon the year of acquisition and quantum of gains. “For investors with windfall gains in the real estate sector, this amendment will significantly reduce the tax burden whereas investors who weren’t able to ride the real estate rally may feel the pinch,” says Archit Gupta, founder and chief executive officer (CEO), Clear Tax.

While this change may negatively impact some investors and create a bearish impact in the short-term, it could have a positive impact in the long run. “Many believe that this move will bring real estate investment at a level playing field with the capital markets and increase investment in the sector significantly,” says Gupta.

According to Adhil Shetty, CEO, Bankbazaar, “With the indexation benefit gone, the relevance of real estate as an investment will reduce, especially in cities where price rise is more muted and averages 3-5 per cent per year.” He adds that earlier one could also include an indexed cost of improvement to the cost of the property, but that will no longer be available.  

Grandfathering clause

In a press conference after the budget, finance secretary TV Somanathan clarified the indexation benefit offered till 2001 would be protected. “Though the Finance Secretary has clarified that the indexation benefit will continue to be applicable to the properties acquired before April 1, 2001, he has not clarified whether the LTCG from such properties would be subject to the new rate of 12.5 per cent. However, a natural corollary of his clarification would be to assume that LTCG on such properties would continue to be taxed at 20 per cent with indexation benefit,” says Kale.

What can you do?

On properties purchased after March 31, 2001, the applicability of the proposed tax norms appears to be inevitable. There are a few exemptions on LTCG that sellers of property can explore.

“To avoid paying tax on capital gains, you may invest in capital gains bonds (under Section 54EC) within a stipulated period, reinvest the capital gain in another residential property within a stipulated time-period (under Section 54), or deposit the capital gains in a capital gains account scheme (CGAS) with a bank until you buy the property that you have finalised  or till you file your tax return for that assessment year, whichever is earlier,”  says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Finally, maintain a proper record of documents that can act as proof of the cost of acquisition of the property, cost of improvements made to the property, expenses related to transfer of the property (like brokerage and registration charges). These will come in handy in case of a dispute with the taxman.