Removal of indexation benefit on sale of property: Majority of taxpayers to have substantial tax savings, says tax department
When selling a property, it's important to know that recent changes to the law mean that you can no longer adjust the purchase price for inflation. This change was announced in the 2024 budget and means that when you sell a property, you won't be able to use inflation to reduce your 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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Note that these proposed changes have come into effect from July 23, 2024.
Indexation benefit removed: What is indexation benefit on selling property, how is it calculated, what has changed
Benefit of indexation on sale of property
Prior to the Budget 2024 announcement, people could use indexation benefit to reduce the tax on the money they made from selling a property. This benefit allowed the difference between the buying and selling price of a property (in other words, the profit) to be adjusted by the current inflation rate during the time the property was owned. So, it helped to reduce the impact of inflation on the taxable profits from selling property.Indexation benefit on sale of property removed; new LTCG rate of 12.5% announced for capital gains on sale of property
“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.
What the tax department has said
On X, the income tax department mentioned that real estate returns are typically around 12-16 percent per year, which is significantly higher than the inflation rate."The indexation for inflation is in the region of 4-5 per cent, depending on the period of holding. Therefore, substantial tax savings are expected to a vast majority of such taxpayers," it said.
Based on the duration of property ownership, the I-T department stated that the new tax rate without indexation is generally more advantageous when compared to the old rate.
The new regime is beneficial for property held for five years when it has appreciated 1.7 times or more, while it is beneficial for property held for 10 years when its value has increased 2.4 times or more, stated the tax department.
It said that if the value of a property purchased in 2009-10 has increased to 4.9 times or more, it is beneficial.
"From the above examples, it is clear that only where returns are low (less than about 9-11 per cent per annum) that the earlier tax rate is beneficial, but such low returns in real estate are unrealistic and rare," the tax department said.
— IncomeTaxIndia (@IncomeTaxIndia) 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.
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This story originally appeared on: India Times - Author:Faqs of Insurances
