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Budget 2024: Will indexation benefit apply to property purchased before 2001?

This article clarifies the indexation benefit available to property purchased before 2001 from official income tax authority sources.

Budget 2024: Will indexation benefit apply to property purchased before 2001?


Posted on 29 Jul 2024 • Updated on: 06 Aug 2024
Author: Sayan Sircar
Tags: Tags Budget ;  Tax ;  Real Estate
8 mins read
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This article clarifies the indexation benefit available to property purchased before 2001 from official income tax authority sources.

Budget 2024: Will indexation benefit apply to property purchased before 2001?

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

📚 Topics covered:

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 things kept unchanged are:

  • Definition of long-term (i.e. eligibility for long-term capital gains or LTCG) holdings kept intact at two years and above
  • Any real estate gains due to selling before two years (i.e. short-term capital gains or STCG) will be taxed at the slab rate of the seller

Read more on the changes introduced here: Budget 2024: A Surprise in Real Estate Sales due to Indexation Benefit Removal: Is it good or bad?

Will indexation benefit apply to property purchased before 2001?

This is a question that many property owners are asking. Here is the scenario.

You have a property purchased / constructed in 1990 for ₹5 lakhs. You are selling this property for ₹1 crore on or after 23rd July 2024.

What is the capital gains tax?

Thankfully, the income tax official Twitter / X handle has clarified this situation like this:

Official Tweet on New Capital Gains Taxation Regime For Real Estate Purchased Before 2001

Source: https://x.com/IncomeTaxIndia/status/1816516685127725434

Therefore, the rule for 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

Final tax payable is the minimum of these two tax values. In case of loss, there is the benefit of rolling forward the capital loss for eight subsequent years.

Note: In another surprise 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 Union Budget 2024 speech date of 23rd July, 2024. 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. 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;”

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

We have covered the impact of this new change in detail here: Budget 2024 taxation rule reversal: grandfathering rule brings back indexation benefit to properties acquired before July 2024

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Also read
Who should invest in target maturity debt funds?

Illustration on tax calculation for real-estate in old vs new tax regime as per Union Budget 2024

The same post has an illustration as well using the same ₹5 lakh property purchased in 1990 and sold in 2024 on or after 23rd July 2024 for ₹1 crore like this:

New Capital Gains Taxation Regime For Real Estate Purchased Before 2001

Source: https://x.com/IncomeTaxIndia/status/1816516685127725434

While the Tweet does not explicitly say it, there is no mention of any change in the indexation benefit on the cost of improvement over the years on the same property which will reduce the old-regime tax value further.

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This post titled Budget 2024: Will indexation benefit apply to property purchased before 2001? first appeared on 29 Jul 2024 at https://arthgyaan.com


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