Homeowners who purchased their property a few years ago should weigh both the options before filing their ITR. In many cases, paying 20% tax with indexation is lighter on the pocket than paying 12.5% tax without indexation.
Property Sales Tax: If you are thinking of selling your house or land this year, do not assume that the new capital gains tax rule of 12.5% will always benefit you. The truth is that if you bought your property on or before July 22, 2024, you also have the opportunity to choose the old rule.
The Finance (No. 2) Act, 2024 has made changes in the taxation of long-term capital gains on immovable property. Although the government has reduced the LTCG tax rate to 12.5% without indexation, it has also introduced a relief provision that allows some taxpayers to avail the benefits of the previous regime if it proves to be more beneficial to them.
If you purchased your property on or before July 22, 2024, you have two options. If you want, you can calculate 20% tax by taking advantage of inflation, or pay 12.5% tax directly without indexation. The government gives you the freedom to calculate both the methods and choose the method which will reduce your tax!
Why does indexation still matter?
Indexation adjusts the purchase cost of a property for inflation using the government’s Cost Inflation Index (CII). By increasing the purchase cost of the property, it reduces the taxable capital gains, which can significantly reduce the tax payable. Especially for properties that have been with you for many years.
This is why a higher tax rate does not always mean a higher tax bill. For example, consider a property purchased for Rs 50 lakh in 2010 and sold for Rs 1.5 crore in 2026. Suppose the indexed cost increases to Rs 90 lakh, the taxable capital gain under the old system would be Rs 60 lakh.
Applying 20% tax rate, the total tax liability is Rs 12 lakh. However, since indexation is not allowed under the new regime, the taxable profit is calculated using the original purchase price (Rs 50 lakh), resulting in a capital gain of Rs 1 crore. At the new tax rate of 12.5%, the tax payable comes to Rs 12.5 lakh. Despite the lower tax rate, the taxpayer has to pay Rs 50,000 more because the benefit of indexation is lost.
Who has the right to choose between the two options?
This option is available only to resident individuals and HUFs who are selling long-term capital assets in the form of land or buildings, which were acquired on or before July 22, 2024. If the property was purchased on or after July 23, 2024, the old indexation regime is no longer available. Such deals will be taxed at the rate of 12.5% without indexation, subject to the conditions prescribed under the Income Tax Act.
To qualify as a long-term capital asset, the asset must generally be held for more than 24 months before being sold.
Capital gains exemptions are still available
Changes in tax rates do not affect the exemptions available under the Income Tax Act. Eligible taxpayers can continue to claim relief under Section 54EC by reinvesting the capital gains in another residential house, or by investing in specified capital gains bonds, subject to fulfilling the prescribed conditions and time limits.
Be sure to compare before filing your ITR
Tax experts say property sellers should calculate their liability under both the tax regimes before filing their income tax return (ITR). While the new rate of 12.5% may benefit many recent buyers, owners who purchased property years ago may find that a 20% tax with indexation results in a lower total tax bill, as inflation significantly increases the indexed cost of purchase.
The post Property Sales Tax: New 12.5% tax is imposed on property sales! Will the old 20% formula offer more savings? first appeared on informalnewz.
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