In the 2024 Indian Budget, significant changes were made regarding the taxation of long-term capital gains (LTCG) on property sales. Here's a simplified explanation:
Removal of Indexation Benefit: Previously, when selling a property, you could adjust the purchase price for inflation (known as "indexation"), which reduced the taxable profit. This benefit has now been removed, meaning you must pay tax on the entire gain without adjusting for inflation.
Reduced Tax Rate: The LTCG tax rate on property sales has been reduced from 20% to 12.5%. However, this new rate applies to the full gain, as the indexation benefit has been removed.
Impact on Different Investors:
Short-Term Investors: Those holding property for less than 10 years and experiencing moderate price increases (less than 10% per year) might pay more tax under the new regime, as they can no longer adjust for inflation.
Long-Term Investors: Investors holding property for more than 10 years, with significant price appreciation (over 10% per year), may find the new tax rate neutral or slightly beneficial, even without indexation.
Example with Numbers
Imagine you bought a property for ₹5 crore. Under the old system, if inflation was 5% per year, and you held the property for 10 years, the indexed cost might rise to around ₹8 crore (due to inflation adjustment). If you sold the property for ₹10 crore, the taxable gain would be ₹2 crore, and at a 20% tax rate, you'd pay ₹40 lakh in taxes.
Under the new system, without indexation, the taxable gain would be the difference between the sale price and the original purchase price, i.e., ₹5 crore. With a 12.5% tax rate, you'd pay ₹62.5 lakh in taxes, even though the tax rate is lower.
Additional Points
The Finance Minister emphasized that these changes simplify tax calculations and standardize the tax treatment of various assets.
There are exceptions for high-value properties (over ₹10 crore) where the benefit of indexation is capped.
These changes aim to streamline and rationalize the tax system but may impact investors differently depending on their property investment strategies and holding periods.
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