This article explains the new of the reversal of the 12.5% without indexation tax rule to allow 20% with indexation for all properties bought before 23rd July 2024.

Disclaimer: Taxation is a dynamic concept and the content of this article is valid on the date of publication and any subsequent updates. Always consult a professional tax advisor before doing anything that leads to taxes being due.

This article is a part of our detailed article series on Union Budget 2024. Ensure you have read the other parts here: Show/Hide

📚 Table of Contents

☰

• What did Union Budget 2024 change about capital gains tax on real estate?
• Case 0 - Base case - Property purchased on or after 23rd July 2024
• Case 1 - Property purchased after 1st April 2001 and before 23rd July 2024
• Case 2 - Property purchased before 1st April 2001
• Case 3 - Property sold before 23rd July 2024
• Does grandfathering of 20% tax on indexation apply to NRIs?

What did Union Budget 2024 change about capital gains tax on real estate?

In a surprise move, Union Budget 2024 changed the capital gains taxation rules for real estate transactions:

• Removed indexation in the name of “simplification” of capital gains tax calculation.
• Reduced the tax rate from 20% with indexation to 12.5% without indexation.

The only aspects kept unchanged are:

• The definition of long-term (i.e., eligibility for long-term capital gains or LTCG) holdings, which remains at two years and above.
• Any real estate gains from selling before two years (i.e., short-term capital gains or STCG) will be taxed at the slab rate of the seller.

We have analysed the impact of this rule change in detail here: Budget 2024: A Surprise in Real Estate Sales due to Indexation Benefit Removal: Is it good or bad?.

However, in another unexpected amendment to the Finance Bill on 6th August 2024, the option of paying 20% tax on gains with indexation has been added to all properties acquired before the Union Budget 2024 presentation date of 23rd July 2024. The exact amendment is this:

“where the income-tax computed .. exceeds the income-tax computed in accordance with the provisions of this Act, as they stood immediately before their amendment by the Finance (No. 2), Act, 2024, such excess will be ignored;”

For properties acquired on or after 23rd July 2024, only the new 12.5% without indexation rule will apply.

This means that for all such properties, including those purchased before 1st April 2001, the capital gains tax can be the lower of:

• 20% with indexation (the previous rule)
• 12.5% without indexation (the new rule)

irrespective of the sale date, thereby offering a grandfathering option for such properties. For properties acquired after 23rd July, only the new 12.5% without indexation rule will apply. The rule is applicable to both individual sellers and Hindu Undivided Families (HUF).

Note: If you read the text of the amendment carefully, then any loss cannot be offset or carried forward here since the amendment does not talk about losses.

We will now deal with all the permutations and combinations of property sale prices and purchase dates to explain what property sellers should do now.

The definition of short-term and long-term gains has not changed. Short-term gains will be taxed at the slab rate plus cess if the holding period is less than two years. In the remainder of the article below, we will only consider the long-term holding period of two years or more.

Case 0 - Base case - Property purchased on or after 23rd July 2024

This is the post-budget period, and grandfathering does not apply. All property sold after two years will be taxed at 12.5% without indexation.

We will now cover the grandfathering case of properties purchased before the Union Budget 2024 presentation date of 23rd July 2024.

Case 1 - Property purchased after 1st April 2001 and before 23rd July 2024

Tax on capital gains will be the minimum of the two rules:

• 20% tax on profit after indexation.
• 12.5% tax on profit without indexation.

To know which option is better, you can use this simple table based on the purchase and selling financial year values. In the old 20%-on-indexed gains case, there is a threshold below which capital gains were zero or negative.

(click to open in a new tab)

Profit post indexation = Selling price - (CII_selling_Year / CII_Purchase_Year) * Buying_Price

In this example, a property bought at ₹10 lakhs in 2006-07 and sold in 2024-25 below ₹29.8 lakhs did not pay any tax.

Here:

Indexed buying price = (363)/(122) * Buying_Price = 2.98x Buying price

So, if sold below 2.98 * 10 lakhs = 29.8 lakhs, it would mean a loss and therefore no tax this year.

Here is the CII table for your reference:

Download as CSV

Any capital losses can be either offset in the current year’s tax return or carried forward. The rules on this are:

Long-term capital loss (LTCL)

• LTCL can only be offset against Long-Term Capital Gains (LTCG).
• It can be carried forward for eight assessment years.

Short-term capital loss (STCL)

• STCL can be offset against both Short-Term Capital Gains (STCG) and LTCG.
• It can also be carried forward for eight assessment years.

Important Points

• Capital losses can be offset only against Capital Gains.
• Capital losses cannot be offset against income from other sources (e.g., salary, business income).
• Income tax return must be filed on time to be able to carry forward Capital Losses.

If you are mathematically inclined, here is the formula which makes the new 12.5% regime pay lesser tax as derived here: 10L to 80L in 23 Years: How to Calculate Sale Price of Property to Pay Lower Taxes after Budget 2024.

If Profit_PCT ≥ 2.6667 * Indexation_PCT then the new regime is better.

where

SP = Selling Price of the property
CP = Cost or construction price of the property
Profit_PCT (profit percentage) = SP/CP - 1
Indexation_PCT = CII_sell / CII_buy - 1

Case 2 - Property purchased before 1st April 2001

The only change, compared to case 1, is arriving at the price on 1st April 2001. The rule for the calculation of capital gains is:

Old regime calculation

Cost of acquisition = minimum of (FMV of the property on 1st April 2001, Stamp Duty Value on 1st April 2001)

Here, FMV is the Fair Market Value determined by a government-approved property valuation expert.

Profit as per old regime with indexation benefit = Sale price - Indexed purchase price

Here, Indexed purchase price = Cost of acquisition * (CII_selling_Year / CII_Purchase_Year) where CII comes from here: How to use the Cost Inflation Index (CII): latest value and historical rates.

Tax as per old regime = 20% of Profit as per old regime with indexation benefit.

New regime calculation (as per Union Budget 2024 for properties sold on or after 23rd July 2024)

Profit as per new regime without indexation benefit = Sale price - Cost of acquisition
Tax as per new regime = 12.5% of Profit as per new regime without indexation benefit.

The final tax payable is the minimum of these two tax values. We have already covered this case in detail before here: Budget 2024: Will indexation benefit apply to property purchased before 2001?.

Case 3 - Property sold before 23rd July 2024

The changes announced in Union Budget 2024 do not apply retrospectively to any property deal concluded before 23rd July 2024. The taxation will be

• short-term (two years or less) at slab
• long-term (two years or more) at 20% tax on profits after indexation

Does grandfathering of 20% tax on indexation apply to NRIs?

Unfortunately, NRIs have been left out of the benefit of grandfathering. Only 12.5% without indexation is applicable in case the property seller is an NRI for all property sales after 22nd July 2024.