TAX MADE EASY SERIES - 2

My IT Return is starting a series of articles highlighting the amendments
made in the recent budget with the help of simple illustrations for easy
understanding of the income-tax payers. These articles will be indexed and
saved on our site for easy reference. Please note, practical insights too will be
shared, enabling error-free return filing by the assessees.

REVISION IN REAL ESTATE INDEXATION RULE

According to the Income Tax Act, 1961, any immovable property with a
holding period of more than 24 months is classified under long-term capital assets
and is liable to be taxed, if sold or transferred under Long Term Capital Gains Tax
(LTCG) on property rules. In the recent budget, changes to the existing scheme have
been announced. The salient features of this change are given below:

1) Resident individuals and Hindu Undivided Family(HUF) have been given
an option to either calculate LTCG tax at the rate of 20% with indexation
benefit or 12.5% without the indexation benefit only for properties
purchased before July 23, 2024.

2) For properties purchased after July 23, 2024, there is no option but to
calculate LTCG at the rate of 12.5% without considering the indexation benefit
for both individuals and the HUF

Important points for calculating LTCG tax on real estate sales:

i) The cost of acquisition of real estate properties
purchased before 2001 will be the fair market value (FMV) not
exceeding the stamp duty value as of April 1, 2001, or the actual cost of
the land or building for the purpose of calculation of long-term capital
gains (LTCG) tax.

ii) Indexation when applied to the cost of acquisition becomes
indexed cost of acquisition. The purpose of indexation is to increase the
cost of assets in line with the inflation trends seen on a yearly basis. It
helps in increasing the historical purchase price of the assets, resulting
in lower capital gains. Central Government notifies the cost inflation
index (CII) in the official gazette on a yearly basis.

Illustrations

Mr. A purchased a property in the year 1995 for an amount of Rs.5,00,000/- The property is sold in FY25 i.e., the current financial year for Rs.80,00,000/-. Let’s calculate the Capital Gains Tax for the current year as per
the latest budget pronouncements.

Original Purchase Price as of 1995 Rs.5,00,000
Fair Market Value as of 1/4/2001 of the property Rs.20,00,000
Stamp Duty Value as of 1/4/2001 of the property sold Rs.5,00,000

*Indexed cost of acquisition in FY 25 is 15*363/100=54.45

54,45,000
(Stamp Duty value being lower than FMV taken for indexation)
Long Term Capital Gain = Sales consideration – Indexed Cost of acquisition
(80,00,000-54,45,000 = Rs.25,55,000/-)OR

Long Term Capital Gain = Sales consideration – Original Purchase price
(80,00,000-15,00,000 = Rs.65,00,000/-) (Value as of 1/4/2001 to be considered
as higher than the purchase price)
LTCG = 25,55,000*20/100 = Rs.5,11,000/-
OR
LTCG = 65,00,000*12.5/100 =Rs.8,12,500/-
Assessee will choose the lower option i.e., 5,11,000

Please note if the property sold is purchased after July 23, 2024, then on its sale after
holding for a period of 24 months or more the option of indexing the cost is
withdrawn and a 12.5% tax will be levied on the difference between Sales
consideration and the purchase price.

Encl: Cost Inflation Index Table