Why you may need to pay Rs 7.80 lakh extra in tax to sell the same property after indexation rule change; get calculations here

Indexation on property: Did you want to sell your property after seeing it handsomely appreciating it for years? Well, you just lost Rs 7.8 lakh after July 23, 2024.
Before the Budget 2024 was announced, the tax code had the indexation provision for property sellers in India. According to that, they could adjust a property's purchase price to reflect inflation's effect on it.

So, if inflation outpaced the rise in the property's value or if the property lost its value over years, the property holder would claim a capital loss in their ITR return.

With that, they were allowed to offset their losses against long-term capital gains (LTCG) in the same financial year.

So, if you purchased a property worth Rs 10 lakh in the year 2000 and you sold it in 2023 for Rs 1 crore, while the indexed price for the same was Rs 1.10 crore, you could show a Rs 10 lakh loss and offset it against capital gains in other assets to reduce yor tax amount.

In her Budget 2024 speech, finance minister Nirmala Sitharaman announced the end of indexation in property.

On the sale of property, the seller will pay 12.50 per cent LTCG.

However, the earlier LTCG for the same was 20 per cent, but with the indexation rule in place, property sellers could save huge tax.

With the new rule in place, will property sellers need to pay more tax?

Or, were they better of in the earlier rule? 

It depends on the purchase price, sell price, duration you hold the property, and the inflation rate during the holding period.

In a calculation, we will show you how the sale of a property before and after the new rule would have cost you hugely in the form of income tax. 

In the calculation chart given below, we are taking the example of a property that was purchased for Rs 40 lakh in 2008 and sold for Rs 1 crore before and after the announcement of July 23.

The calculation goes as follows-

Courtesy: Bankbazaar.com

As you can see, based on the cost inflation index in 2008-09 (137) and 2024-25 (363), the value of the property purchased for Rs 40 lakh would be Rs 1,05,98,540 in 2024-25.

It means that one would have had a loss of Rs 5,98,540 on selling it.

Since the indexation rule was in place, you would have paid zero tax on it.

In fact, you could have claimed losses against capital gains in other assets.

As per the new rule, since you would earn LTCG of Rs 60 lakh on the property, your tax at the rate of 12.50 per cent would be Rs 7,50,000, and after including four per cent cess on it, the tax would increase to Rs 7,80,000.   

AR Hemant, AVP BankBazaar.com says, "So it goes from a loss of Rs 5.98 lakh which you can offset against other gains to Rs 7.8 lakh. So, theoretically an increase of 14 lakh to your tax burden."