Budget 2024: With no indexation, do you have to pay more tax on older property sale? There's a catch

The government has announced a significant change in the tax treatment of immovable properties, clarifying that the indexation benefit will be removed for properties bought after 2001 while retaining it for those purchased before that year. This adjustment accompanies a proposal to reduce the long-term capital gains (LTCG) tax on real estate from 20% to 12.5%, aimed at simplifying tax calculations.

Finance Secretary TV Somanathan explained the rationale behind this change, stating that the new rate without the indexation benefit is effectively higher than the current rate with it. 

The Union Budget 2024-25 effectively splits property sellers into two categories: those who purchased or inherited properties before 2001 and those who did so in 2001 or later. Sellers in the first category continue to benefit from indexation, which adjusts the purchase price of the property for inflation, thus reducing taxable gains. They will also enjoy a reduced LTCG tax rate of 12.5%, down from the previous 20%.

In contrast, sellers in the second category lose the benefit of indexation, meaning their capital gains will be calculated based on the actual purchase price and sale price without any inflation adjustment. They, too, benefit from the lowered LTCG tax rate of 12.5%, but without the cushioning effect of indexation. For instance, an apartment purchased in 2003 will see its capital gains calculated solely based on the difference between the purchase price and the sale price, but at the new 12.5% LTCG rate.

Finance Secretary Somanathan asserted that the changes would not adversely impact the majority of property sellers. "In 95 per cent cases, this 12.5 per cent will benefit. Due to this change, the middle class will benefit," he said.

While the government's changes to the indexation benefit and the LTCG tax rate aim to simplify the tax process and potentially offer tax savings in many cases, the concerns raised by experts underscore the need to closely monitor the real-world impact of these adjustments on the real estate sector and taxpayers at large.

However, experts have voiced concerns, arguing that this shift could lead to a heavier tax burden for property sellers. "Investors will pay tax on the difference between the actual cost and the sale consideration without adjusting for inflation," noted an expert, suggesting that this could hinder the growth of the real estate sector.

Anupama Reddy, vice president and co-group head (corporate ratings) at ICRA, emphasized the potential negative effects, stating, "Despite the LTCG tax rate reduction, the removal of the indexation benefit for property sales would likely result in higher taxes. This is negative for the sector."