Budget 2024: Selling your property now may attract higher tax

Finance minister Nirmala Sitharaman announced a standard long-term capital gains (LTCG) tax during yesterday's (July 23, 2024) finance budget.

Previously, different LTCG rates were applied to various financial and non-financial assets. For example, selling an equity investment held for over a year attracted a 10 per cent LTCG tax, while non-financial assets such as real estate and gold were taxed at 20 per cent.

Now, a flat LTCG tax of 12.5 per cent has been introduced. This has been done to "simplify taxation", according to Sitharaman.

So far, so good. Standardisation can help in avoiding confusion when calculating LTCG tax.

However, the budget's fine print reveals that the government has done away with indexation benefits, a key feature that allowed property and gold sellers to reduce their taxable gains.

How indexation worked

Imagine you bought a property for Rs 50 lakh in 2014-15 and sold it for Rs 1 crore before yesterday's budget. You'd have been able to adjust the cost price of the property with inflation (known as indexation), which means the cost price would have been marked up to around Rs 75.6 lakh on the basis of cost inflation index. The gain of around Rs 24.4 lakh would then be taxed at 20 per cent, resulting in a tax of approximately Rs 4.87 lakh.

Now, without indexation, the property's cost price remains Rs 50 lakh when selling the property for Rs 1 crore. This means you'll pay a 12.5 per cent tax on the Rs 50 lakh gain, amounting to Rs 6.25 lakh.

To sum up, although the LTCG tax for over two-year properties (and gold) has reduced from 20 per cent to 12.5 per cent, the actual tax liability may increase because sellers can no longer adjust their purchase price with inflation. That said, this may vary on a case-to-case basis, depending on the exact purchase/sale price and time.

Also read: New tax regime looks even better now. Time to ditch the old regime?