Budget 2024: Selling Your House May Now Attract Higher Taxes

The removal of indexation benefits for property sales, as announced in Budget 2024, may lead to higher tax liabilities for homeowners.

If you own a house that you plan to sell, you may face a higher tax burden from now on due to the removal of the indexation benefit announced in Budget 2024. Indexation is a method used to adjust the purchase price of an asset, such as property, for inflation over the years. This adjusted price is then used to calculate capital gains, which is the profit made when you sell the asset. Indexation allows the owner to arrive at the value of the property factoring in inflation.

The government publishes a Cost Inflation Index (CII) every year, which measures how much prices have increased compared to the base year (2001-2002). When you sell the asset, you multiply the original purchase price by the CII of the year you sold it and divide it by the CII of the year you bought it. This gives you the inflation-adjusted purchase price. 

To determine the current value of an old property, a valuer first establishes its worth as of April 1, 2001. This base value is then multiplied by an index released annually by the Reserve Bank of India to account for inflation, resulting in the property’s “fair market value” for any year after 2000.

Previously, long-term capital gains from selling property were taxed at 20%, but you could use indexation to reduce your taxable profit. The Budget 2024 has introduced two key changes:

1. The long-term capital gains tax rate on property has been reduced to 12.5%.

2. Indexation has been removed.

This is a significant change. You can no longer adjust the purchase price for inflation. Under the new rules, the capital gain is simply calculated by subtracting the original purchase price from the sale price. This results in a higher taxable capital gain compared to the old system.

Example:

Old System (with indexation): 

  – Mr. A bought a property for Rs 25 lakh in FY 2002-2003.

  – He sells it in FY 2023-2024 for Rs 1 crore.

  – The purchase price of Rs 25 lakh would be adjusted for inflation using the CII for the respective years. This adjusted purchase price would then be subtracted from the sale price to determine the taxable capital gain.

New System (without indexation):

  – Mr. A still bought the property for Rs 25 lakh in FY 2002-2003 and sold it for Rs 1 crore in FY 2023-2024.

  – There is no need to adjust the purchase price for inflation.

  – The capital gain is simply calculated by subtracting the original purchase price (Rs 25 lakh) from the sale price (Rs 1 crore), resulting in a higher taxable capital gain compared to the old system.

For properties purchased many decades ago at a very low price, the entire amount arrived at after deducting the original purchase price from the sale price would be considered as capital gains. Since you can’t adjust the purchase price for inflation, the profit you made on selling the property will appear larger. Even though the tax rate is lower, the higher taxable profit might result in a similar or even higher tax amount compared to the old system.

In essence, while the government has reduced the tax rate, the removal of indexation has offset this benefit for many property sellers, leading to a potential increase in their tax liability. While the long-term capital gains rate reduction aligns with the government’s focus on tax simplification, the removal of indexation could impact investment demand for residential units in the short term. However, experts remain optimistic about the long-term demand driven by end-users and overall economic growth.