Thinking of Selling your Property now will attract a higher Tax rate

The recent changes by the Finance Minister on July 23, 2024, eliminated the indexation benefits that allowed sellers of property and gold to reduce their taxable gains.

How Indexation Worked:
Suppose you bought a property for ₹ 40 lakh in 2015-16 and sold it for ₹ 80 Lacs before the recent budget. You were allowed to adjust the cost price of the property for inflation (using indexation), which would increase the cost price to around ₹ 57.16 lacs, according to the cost inflation index. The taxable gain of approximately ₹ 22.84 lakh would then be taxed at 20 percent, resulting in a tax liability of about ₹ 4.56 lacs. Refer to the illustration below.

Under the New Rules: – Without indexation, the property’s cost price remains ₹ 40 lacs when selling it for ₹ 80 Lacs. Thus, you will pay a 12.5 percent tax on the ₹ 40 lakh gain, amounting to ₹ 5 Lacs which is more by ₹ 44,000 here.

In summary, while the LTCG tax rate for properties held over two years (and gold) has been reduced from 20 percent to 12.5 percent, the actual tax liability may increase since sellers can no longer adjust their purchase price for inflation. The impact will vary depending on the specific purchase/sale price and timing.