Old vs new property indexation tax rules: Which system can help you save Rs 15 lakh on the sale of same property; know through example

What was the new rule announced in Budget 2024?

The government had decreased the tax rate but also removed the indexation benefit.

 

What amendment is made now?

However, as per the new rule announced on Tuesday, August 6, taxpayers can select between a reduced tax rate of 12.5 per cent without indexation or a higher rate of 20 per cent with indexation for properties purchased before July 23, 2024, allowing individuals or Hindu Undivided Families (HuFs) to calculate their taxes under both schemes and pay the lowest amount. This adjustment was implemented by an amendment to the Finance Bill 2024.

 

What did the government say?

This provides significant relief on long-term capital gains for immovable property. The flexibility given by the grandfathering clause applies to any property transactions completed before the Budget's release on July 23. 

Which option a property owner should choose?

Property owners will now have two alternatives when selling their houses, and they may choose the one with the smaller tax burden.

What are the options now?

1) Calculate the 20 per cent tax on long-term capital gains on the sale of immovable property after taking into account the indexation advantage.
2) Calculate the tax on long-term capital gains on the sale of immovable property at 12.5 per cent, ignoring the indexation advantage.

Let's understand with an example:

Before the amendment, the new system had been made mandatory, due to which some people were benefiting, but many people were also facing losses. Suppose you bought a house worth Rs 50 lakh in 2001, which you sell for Rs 2 crore during 2024-25. In such a situation, in the new system, you do not get the benefit of indexation and your total profit is Rs 1.50 crore. Under the new system, you would have to pay a tax of 12.5 per cent i.e. about Rs 18.75 lakh on it.

Pay less tax under this system

Whereas in this case, if you choose the old system of long-term capital gains tax, then now you will get the benefit of indexation. If we include indexation, the value of your house in 2024-25 comes to around Rs 1.80 crore. That means, on selling this house for Rs 2 crore, your long-term gain tax will be considered as Rs 20 lakh. You will have to pay 20 per cent tax on this, which comes to around Rs 14.75 lakh. That is, in this case, by switching from the old capital gains tax system, you will get a benefit of around Rs 15.05 lakh.