In the Union budget for 2024-25, among the 85 proposed amendments in the Finance (No. 2) Bill, 2024, the revision concerning the taxability of long-term capital gains (LTCG) from the sale of immovable property, effective 23 July 2024, has garnered significant attention.
This piece deciphers the complexities of this critical budget amendment, offering practical calculations to understand its implications.
The bill proposes reducing the LTCG tax rate from 20% to 12.5%, while removing the existing indexation benefit under Section 48 of the Income Tax Act.
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The change necessitates a break-even point analysis to understand the trade-off between the pre-budget indexation benefit and the new reduced LTCG rate of 12.5%.
Based on the analysis, the post-budget provisions of taxing long-term capital gains at a reduced rate of 12.5% without indexation will be more advantageous for taxpayers if the property’s appreciation exceeds the specified break-even points for various holding periods. Conversely, if the property’s appreciation is below these points, the pre-budget regime with a 20% LTCG rate and indexation benefits proves more beneficial.
For instance, if a person purchased a property worth ₹1 crore in FY15 and sells it on 24 July 2024, they will pay less LTCG tax under the post-budget regime if the sale price exceeds ₹2.40 crore. If the sale price is below this amount, the pre-budget regime would be more beneficial. The necessary price appreciation for the new regime to be advantageous requires a minimum Compound Annual Growth Rate (CAGR) of 9% to 11.2%. Given India’s average real estate CAGR of 14-15%, the new provisions generally favour taxpayers, except in cases of lower appreciation.
For instance, if a property purchased for Rs.1 crore in FY15 is sold for over ₹2.40 crore after 23 July 2024, the new tax regime would result in lower taxes. Conversely, if the sale price is less than ₹2.40 crores, the pre-budget tax regime would be more advantageous.
In conclusion, for the post-budget regime’s reduced LTCG tax rate of 12.5% without indexation to be more advantageous, property prices must appreciate at a minimum Compound Annual Growth Rate (CAGR) of 9% to 11.2% over holding periods of 5 to 24 years.
According to various research reports, the current average CAGR in India’s real estate market is around 14-15%. Thus, barring exceptional cases where appreciation falls below these break-even points, the post-budget provisions are likely to be more beneficial for taxpayers.
Mayank Mohanka is founder, TaxAaram India, and a partner at S.M. Mohanka & Associates.