Taxation on Real Estate: All You Need To Know

The taxation on real estate now has two options. You either pay 20% long term capital tax indexation or 12.5% without taxation. The choice is all yours now!

Taxation on Real Estate: Union Budget, 2024

Through the Union Budget, 2024 the Hon’ble Finance Minister Smt Nirmala Sitharaman had proposed that the real estate properties will now attract long term capital gains at a flat rate of 12.5%. This tax rate is however, without the indexation. This is to say that with the reduction in capital gains tax rate, the seller will not be able to claim the indexation benefits.

Simply put, there will be two options for property owners now while selling their properties and they can go for the one where they have lower tax liability:

1) Compute the tax on long-term capital gains on the sale of immovable property at 20% with indexation benefit.

2) Compute the tax on long-term capital gains on the sale of immovable property at 12.5% without indexation benefit. 

New Announcement: Big Relief to Real Estate

On 7th August 2024, the government has made an announcement that the taxpayers can now choose between a lower tax rate of 12.5% without indexation or a higher rate of 20% with indexation. Accordingly, the taxpayer can pay the tax amount whichever is lower of the two.

Book Income Tax Consultation

What all properties can choose between the two tax rates?

The option to choose between the two tax rates is available to all the properties purchased before 23 July, 2024. Therefore, the properties bought and sold after 23rd July, 2024 have to pay tax @12.5% without any indexation.

Who is eligible to choose between the two tax rates?

Firsly, only individuals and HUFs can choose between the two tax rates. Further, this option is available only if the selling of the property is before 23rd July, 2024.

And, secondly, the options of the tax rates with or without indexation is available on commercial as well as non-commercial properties.

Further, there cannot be claiming of indexation on losses. Therefore, the owners cannot carry forward or offset their losses.

What factors should you consider to choose between the two tax rates?

The following factors must be kept in mind to choose between the two tax rates:
– Purchase price of the property
– Age of the property
– Price growth of the property
– Duration of holding the property, etc

Cost Inflation Index Table from FY 2001-02 to FY 2024-25

Financial YearCost Inflation Index (CII)
2001-02 (Base year)100
2002-03105
2003-04109
2004-05113
2005-06117
2006-07122
2007-08129
2008-09137
2009-10148
2010-11167
2011-12184
2012-13200
2013-14220
2014-15240
2015-16254
2016-17264
2017-18272
2018-19280
2019-20289
2020-21301
2021-22317
2022-23331
2023-24348
2024-25363

What is the formula for calculating Cost Inflation Index?

The formula to calculate the cost inflation index is as follows:

Cost Inflation Index (CII) = CII for the year the asset was transferred or sold / CII for the year the asset was acquired or bought

Illustration (on the basis of value growth)
Purchase Price (2001)Rs. 10 LacsRs. 10 LacsRs. 10 LacsRs. 10 LacsRs. 10 Lacs
Property Growth Rate (Yearly)4%6%8%10%12%
Sale Price (2024)Rs. 2,46,47,155Rs. 3,81,97,497Rs. 5,87,14,636Rs. 8,95,43,024Rs. 13,55,23,473
With IndexationRs. 3,63,00,000Rs. 3,63,00,000Rs. 3,63,00,000Rs. 3,63,00,000Rs. 3,63,00,000
Capital Gains (Old Tax Rule)Rs. 1,16,52,845Rs. 1,18,97,497Rs. 2,24,14,636Rs. 5,32,43,024Rs. 9,92,23,473
Old Tax Rate @20%0%Rs, 3,79,499Rs. 44,82,927Rs. 1,06,48,605Rs. 1,98,44,695
Capital Gains (without indexation)Rs. 1,46,47,155Rs. 2,81,97,497Rs. 4,87,14,636Rs. 7,95,43,024Rs. 12,55,23,473
New Tax Rate @12.5%Rs. 18,30,894Rs. 35,24,687Rs. 60,89,330Rs. 99,42,878Rs. 1,56,90,434
Benefit under New Tax RateRs. 18,30,894Rs. 31,45,188Rs. 16,06,402Rs. 7,05,727Rs. 41,54,260
Beneficial LTCG RuleOldOldOldNewNew

Purchase year: 2001, sale year: 2024, number of years: 23, purchase price: Rs 10,000,000, CII in purchase year 100, CII in sale year: 363 

Illustration (on the basis of year of purchase)
Property Transfer ScenariosProperty IProperty IIProperty IIIProperty IV
Date of acquisition01/01/200501/01/201001/01/201501/01/2019
Financial Year Applicable2004-052009-102014-152018-19
Cost of acquisitionRs. 5,00,000Rs. 50,00,000Rs. 50,00,000Rs. 1,00,00,000
Cost Inflation Index in Acquisition Year113148240280
Date of Transfer25 August, 202425 November, 202425 January, 202525 March, 2025
Financial Year2024-252024-252024-252024-25
ConsiderationRs. 25,00,000Rs. 2,50,00,000Rs. 2,00,00,000Rs. 1,60,00,000
Cost Inflation Index363363363363
Indexed Cost of Acquisition for the year of transferRs. 16,06,195Rs. 1,22,63,514`Rs. 75,62,500Rs. 1,29,64,286
LTCG after indexationRs. 8,93,805Rs, 1,27,36,486Rs. 1,24,37,500Rs. 30,35,714
LTCG without indexationRs. 20,00,000Rs. 2,00,00,000Rs. 1,50,00,000Rs. 60,00,000
Income Tax As per Old Tax RateRs. 1,78,761Rs. 25,47,297Rs. 24,87,500Rs. 607413
Income Tax As per New Tax RateRs. 2,50,000Rs. 25,00,000Rs. 18,75,000Rs. 7,50,000
Which Tax Rate is Better?OldNewNewOld
Tax SavingsRs. 71,239Rs. 47,297Rs. 6,12,500Rs. 1,42,857

From the above illustrations, it implies that if the value of the property is more than the inflation rate, then choose the new tax rate of 12.5% without indexation. Otherwise, one can go for the old rate @20% with indexation.

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