Indexation benefit removed: What is indexation benefit on selling property, how is it calculated, what has changed This benefit enabled the difference between the purchase and sale price of a property (i.e., the profit) to be modified by the current inflation rate during the time when the property was owned
In the context of selling a property, it's important to note that inflation no longer provides the same benefits it once did. The budget 2024 announced the removal of the indexation benefits available on the property sale. Due to this many people who sell their property will now not be able to inflate their purchase price and reduce their capital gains.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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Removal of indexation benefit on sale of property: Why 2001 is a critical year when selling your house
Previously, individuals in India could leverage what is known as the 'indexation benefit' to minimize the tax on the profit earned from selling a property. This benefit allowed the variance between the purchase and sale price of a property (i.e., the profit) to be adjusted by the prevailing inflation rate during the period when the property was owned. Therefore, it acted as a tool to mitigate the impact of inflation on taxable profits from property sales.
This particular provision in the tax code enabled taxpayers to benefit from a significant reduction in their tax payments based on the duration for which they owned a property. In cases where inflation outpaced the increase in property value or if the property lost value, taxpayers had the option to claim a capital loss. This allowed them to offset taxes on other capital gains they may have incurred during the year, potentially reducing their overall tax liability.
“After July 23, sale of houses bought after 2001 will attract 12.5% (long-term capital gain) tax. Depending on the amount involved the actual tax rate could go up to 14.95% (12.5% + 15% surcharge + 4% cess). Unless you decide to buy another property and pay no tax at all,” stated a Times of India news report.
Removal of indexation benefit: You may still owe tax even if your 'return' is negative
Here’s an example, according to the Times of India report:
Market value of an inherited house purchased after 2001 (zero purchase price): Rs 5 crTax due: Rs 74.75 lakh (@14.95%) A new house worth Rs 5 crore (or more) boughtTax to be paid: Rs 0 (tax exemption under section 54)Marketvalue of the house after two years (as there is a 2-year lock-in period): Rs 6 croreTax due: Rs 14.95 lakh (on Rs 1 crore, difference between purchase-sale price)Tax saved Rs 58.8 lakh (Rs 74.75 lakh – Rs 14.95 lakh)Even this tax can be saved if the amount is invested in capital gains bonds (e.g. REC, NHAI, PFC) up to Rs 50 lakh. If the property is held jointly, the eligibility goes up to Rs 1 crore. The section 54 benefit is capped at Rs 10 crore.
Experts expect an increase in the housing market due to the opportunity to avoid long-term capital gains tax when selling old properties.
INDEXATION EXPLAINED
Here is an explainer on what is indexation benefit, according to Times of India.
What is indexation benefit?
Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it.How is it calculated?
The income-tax department uses cost inflationindex (CII) to calculate the inflation-adjusted cost of acquiring speci?ed assets. Adjusting to inflation increases the acquisition cost, thus reducing the long-term capital gains tax. Every year, the central govt publishes CII through its official gazette.What is the base year?
Initially, I-T department had set 1981 as the base year and later shifted it to 2001, with a base value of 100. Each year’s index is computed relative to this base. The formula to calculate the inflation-adjusted cost is : Indexed cost of acquisition = (Cost of acquisition * CII of year of sale)/CII of year of purchase.What has changed?
Budget eliminates indexation benefit for all assets (barring property acquired prior to 2001). This change is likely to lead to higher capital gains tax on sale of long-term capital assets#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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This story originally appeared on: India Times - Author:Faqs of Insurances
