Understanding Long-Term Capital Gains (LTCG) Tax on Property Sales Post-Budget 2024: A Case Study

The Union Budget 2024-25 introduced significant changes to India’s capital gains tax regime, reshaping how property transactions are taxed. If you’re planning to sell a property, understanding these changes is critical for efficient tax planning.

Let’s delve into the specifics of a case study to analyze the tax implications and strategies to save taxes on a house sale post-July 23, 2024.

Case Background

A residential property spanning 1,725.9 square feet was sold for Rs 2 crore. The fair market value (FMV) of the property as of April 1, 2001, was Rs 3,400 per square meter, and the present circle rate (April 2024) is Rs 19,000 per square meter. The property was co-owned equally by two individuals, with the proceeds split equally.

The Cost Inflation Index (CII) for FY 2001-02 was 100, and for FY 2024-25, it is 363. Below, we calculate the long-term capital gains tax implications using both indexation and non-indexation methods, under the revised tax regime.

Key Tax Changes Introduced in Budget 2024-25

• The Long-Term Capital Gains (LTCG) tax rate was reduced from 20% to 12.5%.

• Taxpayers who purchased properties before July 23, 2024, can opt between:

  1. Paying a 12.5% LTCG tax without indexation.

  2. Paying a 20% LTCG tax with indexation.

These changes aim to simplify tax structures while offering taxpayers flexibility.

Capital Gains Calculation

A) With Indexation

1. Cost of Acquisition (2001):• FMV (2001) × Area (in sq. m) • Rs 3,400 × 80.17 = Rs 2,72,578

2. Indexed Cost of Acquisition:• Indexed Cost = Cost of Acquisition × (CII 2024-25 / CII 2001-02) • Rs 2,72,578 × (363 / 100) = Rs 9,89,453

3. LTCG (with Indexation):• Capital Gain = Sale Price − Indexed Cost • Rs 1,00,00,000 (half share) − Rs 9,89,453 = Rs 90,10,547

4. Tax Liability (20%):• Tax = Rs 90,10,547 × 20% = Rs 18,02,109

B) Without Indexation

1. LTCG (without Indexation):• Capital Gain = Sale Price − Cost of Acquisition • Rs 1,00,00,000 (half share) − Rs 2,72,578 = Rs 97,27,422

2. Tax Liability (12.5%):• Tax = Rs 97,27,422 × 12.5% = Rs 12,15,928

Comparison:

• Tax with Indexation: Rs 18,02,109

• Tax without Indexation: Rs 12,15,928

Choosing the non-indexation option results in lower tax liability in this scenario.

Tax-Saving Strategies

To reduce or avoid paying capital gains tax, you can utilize the following provisions under the Income Tax Act:

1. Reinvestment in Residential Property (Section 54):

   • Reinvest the capital gain in a new residential property within two years of the sale (or construct within three years).

   • This allows for a full exemption on the capital gains amount.
     

2. Investment in Capital Gains Bonds (Section 54EC):

   • Invest up to Rs 50,00,000 in bonds issued by REC or NHAI within six months of the sale.

   • These bonds have a five-year lock-in period, providing a secure tax-saving option.

Points to Note:

• Eligibility for Indexation: Taxpayers can choose indexation only if the property was purchased before July 23, 2024.

• Basic Exemption Limit: Ensure that your basic exemption limit (Rs 3,00,000 in this case) is already utilized by other income sources before considering these calculations.

• Other Deductions: The calculations exclude cess, surcharge, and interest.

• Area Conversion: Ensure accurate conversion between square feet and square meters when calculating the FMV and circle rate.

Conclusion

The Budget 2024-25 reforms bring significant changes to the capital gains tax structure, offering taxpayers new options but requiring careful planning. In this case study, opting for the non-indexation method results in a lower tax burden. However, taxpayers should evaluate their specific circumstances and consult a qualified tax advisor or financial consultant before making a decision. With smart planning, you can efficiently minimize your tax liability while optimizing financial outcomes.