There is an announcement in Budget 2024 which will give a big blow to property sellers. A big benefit available on selling property called indexation has now been removed. Although in the budget, the Long Term Capital Gain Tax (LTCG on Asset) applicable on sale of property has been reduced from 7.5% to 12.5%, but this will not provide as much relief as it was earlier. In simple words, now you will have to pay more tax on property on selling property than before.
Let us know in detail about this announcement made in the budget in simple language, how much tax will have to be paid if you sell a property? How much did you have to pay earlier and how can you calculate tax on your property income?
LTCG tax on property reduced in the budget, but…
In the budget on July 23, Finance Minister Nirmala Sitaran made a big announcement on capital gains tax on sale of property. Giving relief, the Finance Minister said that the 20 percent Long Term Capital Gain Tax (LTCG) in real estate has been reduced to 12.5 percent. At first glance, it would seem that a big relief has been given by reducing the tax on sale of property, but it is not so.
Actually, Finance Minister Nirmala Sitharaman has made another major change. Indexation benefit received on sale of property has been removed. Indexation was a tool that reduced the amount of profit that was subject to Long Term Capital Gains (LTCG) tax on sale of property and then imposed LTCG tax (20%) on the remaining amount. With this you had to pay less tax, but now you will have to pay more tax.
How did indexation work?
However, to understand this tax structure on property, it is very important to understand Indexation. Indexation was a benefit that adjusted for long-term profits made on selling property and inflation. Then tax was imposed on property. To simplify it further, 10 years ago inflation was something else, but today it is something else. In such a situation, indexation used to adjust the profit made on the property according to inflation and then tax (Capital Gains Tax) was levied.
Let us know how indexation is calculated…
(Indexation = CII of the year sold/CII of the year purchased x purchase price of the property)
Earlier on which amount was tax levied and now…?
After understanding indexation, now you can understand this tax structure on property with an example. Suppose if you bought a property in the year 2000 for Rs 20 lakh and sold it in 2009 for Rs 35 lakh, then you made a profit of Rs 15 lakh. But here you did not have to pay tax on the entire Rs 15 lakh, indexation benefit (Rs 29,92,288) would have been deducted from it. After this, 20% LTCG tax would have to be paid on the remaining amount of Rs 5,07,712, but now 12.5% tax will have to be paid on the entire Rs 15 lakh.
- According to the first rule, using the indexation method, Rs 5,07,712 would have been taxed at 20%, i.e. Rs 1,01,542 would have to be taxed.
- Now under the new rule, 12.5% tax will have to be paid on total Rs 15 lakh without indexation. Meaning Rs 1,87,000 will have to be paid.
How to calculate indexation?
To arrive at the indexation, the Cost Inflation Index (CII) of the year the property was sold has to be divided by the Cost Inflation Index (CII) of the year the property was purchased. Whatever number comes, it will have to be multiplied by the cost of acquisition i.e. the property purchase amount. Then you will get Indexation. Let us tell you that CII of 2024-25 is 363.