The Union Budget 2024 has introduced a significant change in the taxation of capital gains arising from the sale of immovable property. As per the announcement, indexation benefits will no longer be available for properties purchased on or after 23rd July 2024. This move is expected to impact both real estate investors and individual property buyers.
What is Indexation?
Indexation is a method of adjusting the purchase price of an asset for inflation using the Cost Inflation Index (CII) notified by the government each year. This adjustment reduces the taxable capital gains when the property is sold, thereby lowering the tax liability.
For example:
If you bought a property in 2010 for ₹50 lakh and sold it in 2024 for ₹1 crore, using indexation, the purchase price could be adjusted to reflect inflation over those years. This would significantly reduce the taxable capital gain amount.
What Has Changed in Budget 2024?
The Budget proposes that:
✅ For properties purchased on or after 23rd July 2024, indexation benefits will not be allowed while calculating capital gains.
✅ Capital gains on such properties will be calculated based on the actual cost of acquisition, without any inflation adjustment.
✅ The move is aimed at simplifying the capital gains tax structure and broadening the tax base.
Properties Affected by This Change:
- Residential properties (houses, apartments, plots)
- Commercial properties (shops, offices)
- Land (agricultural and non-agricultural)
This change applies to both individuals and companies purchasing immovable property.
Example to Understand the Impact
Before the Change (With Indexation):
- Purchase Price (2015): ₹40 lakh
- Sale Price (2024): ₹80 lakh
- Indexed Cost (approx.): ₹60 lakh
- Taxable Capital Gains: ₹20 lakh
After the Change (No Indexation for Property Bought After 23 July 2024):
- Purchase Price (2025): ₹50 lakh
- Sale Price (2030): ₹1 crore
- Taxable Capital Gains: ₹50 lakh (No indexation allowed)
Clearly, without indexation, the taxable capital gains increase significantly, resulting in higher tax outgo.
Why This Move?
The government has cited the following reasons for this decision:
- To streamline tax provisions and reduce complexities
- To prevent excessive tax benefits being availed due to indexation in high-inflation periods
- To ensure uniformity in capital gains taxation across different asset classes
What Should Property Buyers & Investors Do?
- If you are planning to buy property, be aware that purchases made before 23rd July 2024 will still enjoy indexation benefits upon sale.
- For purchases made on or after 23rd July 2024, factor in the increased tax liability while calculating future returns.
- Real estate investors may need to reassess investment strategies, especially those relying on long-term capital gains tax benefits.
Final Thoughts
The removal of indexation for properties purchased after 23rd July 2024 marks a pivotal change in real estate taxation. While it simplifies tax rules, it may also reduce the attractiveness of real estate as an inflation-hedged investment. Buyers and investors should plan accordingly and consult tax advisors to understand the long-term impact on their portfolios.
Frequently Asked Questions (FAQs)
1. What is indexation benefit in property taxation?
Indexation allows the purchase price of a property to be adjusted for inflation using the Cost Inflation Index (CII), thereby reducing taxable capital gains when the property is sold.
2. What change has been announced in Budget 2024 regarding indexation?
Budget 2024 proposes that indexation benefit will not be available for properties purchased on or after 23rd July 2024 while calculating capital gains.
3. Does this change apply to all types of properties?
Yes, the removal of indexation applies to all immovable properties, including residential property, commercial property, land, and plots.
4. Will indexation still apply to properties bought before 23rd July 2024?
Yes, properties purchased before 23rd July 2024 will continue to enjoy indexation benefits upon sale, provided they meet the conditions for long-term capital gains.
5. What is the impact of this change on capital gains tax?
Without indexation, the taxable capital gains amount will be higher, leading to an increased tax liability for property owners who purchase after 23rd July 2024.
6. Why has the government removed indexation benefits?
The government aims to simplify the capital gains tax structure, prevent excessive tax benefits due to inflation adjustments, and bring uniformity across different asset classes.
7. Does this change apply to Non-Resident Indians (NRIs) as well?
Yes, the removal of indexation benefit applies to all taxpayers, including NRIs, for properties purchased in India after 23rd July 2024.
8. How should property buyers plan after this change?
Buyers should carefully assess the long-term tax implications before purchasing property after 23rd July 2024 and may consider consulting a tax advisor for better planning.
9. Does this change affect properties bought through inheritance or gift?
The government has not specifically mentioned inherited or gifted properties in this context. However, generally, for capital gains calculation, the original owner’s purchase date is considered, which may still allow indexation in such cases. It’s advisable to consult a tax expert for clarity.
10. Is this change applicable to agricultural land?
Yes, the change applies to all types of immovable property, including land, unless exempted under specific provisions of the Income Tax Act (like certain agricultural lands).