A very significant change that was brought in by the Union Budget 2024 was related to Long Term Capital Gains (LTCG) on sale of immovable property and its taxability.
Before this change was effected, the sellers could adjust the cost of acquisition and cost of improvements of property for inflation using the Cost Inflation Index (CII), as available under the second proviso of Section 48 of the Income Tax Act, and then calculate the LTCG, thus reducing the gains. The rate of tax on such LTCG was 20% (i.e. on or before 23.07.2024).
When the CII was brought in, its purpose was that taxpayers are taxed on inflation adjusted profits. It allowed the taxpayers to account for inflation in the cost of purchase of the asset so that only real profits are taxed.
However, under Budget, 2024 the indexation benefit on cost of acquisition and cost of improvement is totally withdrawn on assets purchased on or after 23rd July, 2024.
The Union Budget 2024 also reduced the rate of tax on these LTCG to 12.5%, but there is a catch in it. The sellers are not allowed to adjust the cost of acquisition/improvement for inflation.
The below-mentioned example is illustrating the situations pre and post amendment:
| S. No. | Particulars | After Amendment (On or after 23.07.24) – Tax Rate 12.5% | Before Amendment (Before 23.07.24) – Tax Rate 20% |
| 1 | Sales Price | 1,00,00,000/- | 1,00,00,000/- |
| 2 | -Cost of Acquisition (dated 01.04.2001) | 15,00,000/- | 15,00,000/- |
| 3 | -Indexed Cost of Acquisition | —— | 54,45,000/- |
| 4 | Capital Gains | 85,00,000/- | 45,55,000/- |
| Tax Payable | 10,62,500/- | 9,11,000/- |
Clearly, the assessee is paying more tax post amendment as illustrated above.
However, the huge public backlash after the amendment was proposed, led the government to make an amendment to Section 112 of the Act. The second proviso was inserted which provides that IN CASE OF SALE OF IMMOVABLE PROPERTY ONLY (i.e. land or building or both), if the date of acquisition is before 23.07.24 and date of transfer is on or after 23.07.24, the assessee has the option to choose any of the regimes i.e. old or new. That is if:
1. The seller is a resident individual or resident HUF only.
2. LTCG arises only on transfer of land, building or both.
3. The asset was acquired before 23rd July, 2024.
4. The asset is transferred on or after 23rd July, 2024.
The assessee (seller) has the option to pay tax @ 12.5% (without indexation) OR pay tax @ 20% (with indexation) – which is referred to as GRANDFATHERING.
Therefore, if all the prescribed conditions are met, assessee can choose either of the options for paying tax on LTCG.
For properties purchased on or after 23.07.2024, INDEXATION IS COMPLETELY REMOVED for calculating LTCGs. This will, in a way, bring parity between LTCG and STCG as both the gains will now be calculated in a similar manner i.e. only trading profits will be offered for taxation.
Author Bio
Request urgent response on Capital Gains
1/ Purchased Property (Plot of Land) in 1980
2/ Sold Property (Land plus 25 % construct) in May 2024 for 3 Cr
3/Indexation Cost of Property (Land plus building) – Rs 1.75 Cr
4/ Therfore Capital Gains 3.0-1.75 =1.25 Cr
5/ I have opened a Cap Gains acct in SBI for 1.30 Cr
I have to reflect this transaction in Tax return by Sep 2025 hence the urgency
Question?
Am I entitled to Full Cap Gains Exemption of 1.25 Cr or Part.
If Part then how much ?
Under which Rules /Section in both cases
Is this transaction under Sec 54 or 54F
Thanks – Regards
Full exemption under section 54. But will have to but/construct property within prescribed time limits.
I have sold the property in May 2024, which was bought in Nov 2022. i wan to opt 12.5% tax without indexation, Do i have choice to select the rate of tax or i am forced to accept 20% with indexation
Have a query wrt sale of land and LTCG: If I have LTC Loss per previous practice with Indexation and LTCG as per 2024 changes due to no indexation benefit, can I be allowed to compute LTC Loss and carry forward that to future years. to file ITR2. Pls if you can advise.
You have limited yourself only comparing the tax savings under the Old and new scheme. There is lingering doubt among professionals. Is the seller who opts for 12..5% scheme, can claim exemption for reinvestment of the sale proceeds under Sections 54/54F/54EC and thereby completely avoid paying tax?
The seller can claim exemptions under sections 54/54F/54EC. HOWEVER, the amount of capital gains against which investment to be made to claim exemptions, will be calculated without considering the benefits of indexation.
This will be applicable even for properties purchased before 23.07.2024.
HOWEVER, the amount of capital gains against which investment to be made to claim exemptions, will be calculated without considering the benefits of indexation. This will be applicable even for properties purchased before 23.07.2024.
UNDER WHICH SECTION OF INCOME TAX ACT??
Read more at: https://taxguru.in/income-tax/long-term-capital-gain-immovable-properties-budget-2024.html
Copyright © Taxguru.in
Is the Indexation not available, if the seller is NRI?
The Grandfathering benefit is ONLY AVAILABLE TO RESIDENT INDIVIDUALS/HUFs. Hence, NRIs can not take benefit of indexation.