Finance Minister Nirmala Sitharaman introduced major changes to capital gains taxes in the Union Budget 2024, especially for real estate by removing indexation benefits. These changes aim to ease taxpayers’ compliance burden but could create challenges for those selling properties or dealing in real estate.
The new rules are likely to increase tax liability on long-term capital gains from sale of property purchased after 2001. Previously, the government taxed these gains at 20% with indexation benefits, allowing property owners to adjust for inflation and reduce taxable profits. According to the new budget, the tax rate for these gains will be 12.5%, but without indexation.
In simple terms, you’ll now pay a lower tax rate (12.5%) on profits from selling property, but you won’t be able to reduce your taxable profits by accounting for inflation. This could result in higher taxes compared to the old system. It’s important to note that this change also affects other assets like gold.
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What is Indexation Benefits?
Indexation helps in adjusting the purchase price of an investment to account for inflation. This also helps taxpayers to lower their tax payments based on how long they’ve owned the property. If inflation is higher than the property’s value increase or if the property loses value, taxpayers can claim a capital loss. This loss can offset other capital gains, reducing their overall tax liability.
Let us understand this with the help of an example:-
Let’s say you bought a piece of property 10 years ago for Rs 1,00,000. Over time, due to inflation, the value of money changes. Indexation helps adjust this purchase price to account for that change. Here’s how it works:
Original Purchase Price – You bought the property for Rs 1,00,000.
Inflation Adjustment – Assume the inflation index at the time of purchase was 100. Now, after 10 years, the inflation index has risen to 200. This means prices in general have doubled over these 10 years.
Indexed Purchase Price – To adjust for inflation, you multiply the original purchase price by the new index divided by the old index.
Indexed Purchase Price = Rs 1,00,000 x (200 / 100) = Rs 2,00,000.
Selling Price – Suppose you sell the property now for Rs 3,00,000.
Capital Gain Calculation
Without Indexation: Capital Gain = Selling Price – Original Purchase Price = Rs 3,00,000 – Rs 1,00,000 = Rs 2,00,000.
With Indexation: Capital Gain = Selling Price – Indexed Purchase Price = Rs 3,00,000 – Rs 2,00,000 = Rs 1,00,000.
Tax Impact
Without Indexation – You would pay taxes on a capital gain of Rs 2,00,000, which is Rs 25,000.
With Indexation – You would pay taxes on a capital gain of Rs 1,00,000, which is Rs 20,000.
Example with Capital Loss
Now, let’s consider if the property’s value didn’t increase as much as inflation or even decreased.
Original Purchase Price – Rs 1,00,000.
Inflation Adjustment – Indexed Purchase Price = Rs 2,00,000 (same calculation as above).
Selling Price – Suppose you sell the property for Rs 1,50,000.
Capital Loss Calculation
Without Indexation: No loss, because Selling Price > Original Purchase Price.
With Indexation: Capital Loss = Indexed Purchase Price – Selling Price = Rs 2,00,000 – Rs 1,50,000 = Rs 50,000.
By deducting this Rs 50,000 capital loss from other capital gains, you can reduce your overall tax liability for the year.
Also Read: Budget Impact: Jewellery Demand Rises as Gold Prices Fall Ahead of Festive Season!
The removal of indexation benefits is a major worry for many real estate investors, especially those holding properties for the long term. Without indexation, the taxable profit from selling real estate will likely increase, raising the seller’s tax bill.
This could significantly cut into their net profit from the sale. The higher taxes might reduce the overall return from selling property, which could discourage people from investing in real estate, especially for long-term investors who feel the impact of inflation more.
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