Now, how will taxes on the sale of a property be calculated?
When Finance Minister Nirmala Sitharaman presented the full budget for the financial year 2024-25. Then, the biggest change was seen in the form of many changes that were made in the Long Term Capital Gains Tax (LTCG Tax). On one hand, the government increased its rate from 10 per cent to 12.5 per cent. On the other hand, by removing the benefit of indexation of assets like property and gold, its tax rate was reduced from 20 per cent to 12.5 per cent. All this change has made the investors who are into real estate more worried. Therefore, now the Income Tax Department has made it clear how the LTCG tax will be calculated on the sale of property.
The Income Tax Department says that while calculating LTCG tax, only the purchase cost of immovable property or property purchased before 2001 will now be considered as the original cost. The fair market value as on April 1, 2001 (not exceeding the fair market value, stamp duty value) will be the actual cost of any land or building. The cost after this will remain under the ambit of capital gains.
The indexing benefit has been removed.
The benefit of indexation, which has been removed by the government in the calculation of LTCG tax, serves to remove the effect of inflation at the time of sale of a property or gold. Thus, LTCG tax of 20 per cent is levied on the capital gain after removing the effect of inflation. To simplify things, the government has removed indexation while the LTCG tax rate has been reduced to 12.5 per cent.
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The Income Tax Department has said that the benefit of indexation will not be available for properties purchased after April 2001. While in case of properties purchased before 2001, the fair price value (not exceeding the stamp duty value) can be used as a basis for adjusting for inflation. In case of sale of property before 2001, indexation will be calculated and deducted from the sale value and subsequently LTCG tax of 20 per cent will be levied.
Understand the issue with the example of Income Tax Department.
The Income Tax Department has tried to explain this with an example. According to this, suppose a person purchased a property for five lakh rupees in 1990. As per the stamp duty rate from 1st April 2001, the price of this property became Rs 10 lakh and the fair market value became Rs 12 lakh. Now, if it is sold for Rs 1 crore after 23rd July 2024, its stamp duty rate or the fair market value as on 1st April 2001, whichever is lower, will be its cost.
Now when the tax on this is calculated in the financial year 2024-25, the indexation cost will be Rs 36.3 lakh (Rs 10 lakh X 363/100). Here 363 is the cost inflation index for the financial year 2024-25. This index is notified by the Income Tax Department. Thus, the sale price of the person’s property in terms of LTCG tax will be Rs 63.7 lakh (minus Rs 36.3 lakh from Rs 1 crore). If tax was paid on this at the rate of 20 per cent, then the LTCG tax would have been Rs 12.74 lakh.
Now in this new system where indexation has been removed, the taxable price of LTCG will be estimated at Rs 90 lakh (cost of Rs 1 crore less Rs 10 lakh) and the LTCG tax on this at the rate of 12.5 per cent will be Rs 11.25 lakh crore.
