Earlier in the Union Budget for 2024-25, the government announced the elimination of the indexation benefit for the sale of immovable property. However, this decision was subsequently reversed through an amendment to the Finance Bill 2024.
The amendment reinstated the indexation benefit for properties acquired before July 23, 2024. Consequently, individuals and Hindu Undivided Families (HUFs) who purchased residential or commercial real estate prior to this date now have two options for calculating their long-term capital gains (LTCG) tax: they can choose to pay a 12.5% tax on LTCG without indexation benefits or a 20% tax with indexation benefits.
Insights into capital gains tax calculations for land sales reveal the complexities involved. Understanding these calculations and the recent changes in indexation rules is essential for accurately determining tax liabilities and making informed investment decisions.
This article aims to clarify these changes, providing illustrations to facilitate understanding.
Capital gains arise from the profit made when transferring a capital asset. These gains fall into two categories:
Long-Term Capital Gains (LTCG): Gains from the transfer of assets held for more than 24 months.
Short-Term Capital Gains (STCG): Gains from the transfer of assets held for 24 months or less.
Budget 2024 Amendments:
Previously, long-term capital gains were adjusted for inflation through indexation. Under Budget 2024, the indexation benefit for LTCG was removed, and the tax rate for LTCG was reduced from 20% to 12.5%. However, the government has offered taxpayers the option to compute taxes on real estate transactions involving properties purchased before July 23, 2024, using either the new 12.5% rate without indexation or the previous 20% rate with indexation.
Example Calculation for LTCG:
If a property is sold for Rs 10,00,000 during FY 2024-25 and was purchased for Rs 2,00,000 in June 2001, here’s how the tax would be computed:
Comparison of LTCG with and without Indexation as per Budget 2024:
With Indexation Benefit:
- Sale Consideration: Rs 10,00,000
- Cost of Acquisition (Adjusted for Inflation): Rs 7,26,000 (calculated as Rs 2,00,000 multiplied by 363/100)
- Long-Term Capital Gains (LTCG): Rs 2,74,000 (sale price Rs 10,00,000 minus adjusted cost of acquisition Rs 7,26,000)
- Tax: Rs 54,800 (20% of LTCG)
Without Indexation Benefit:
- Sale Consideration: Rs 10,00,000
- Cost of Acquisition: Rs 2,00,000 (original purchase price)
- Long-Term Capital Gains (LTCG): Rs 8,00,000 (sale price Rs 10,00,000 minus original cost Rs 2,00,000)
- Tax: Rs 1,00,000 (12.5% of LTCG)
In summary, opting for indexation results in a lower tax amount, but requires using a 20% rate. Conversely, without indexation, the tax is higher at a rate of 12.5%.
Tax Query Section
I am a home maker. I earn small amounts by buying and selling shares for the short term (after holding for one or two months). I don’t have any other income. Do I need to pay any tax on the profit earned from these transactions? Since my income is below the taxable limit of ₹7 lakh, I think it is not taxable. Kindly advise.
Jyothi
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