India’s honourable Finance Minister, Nirmala Sitharaman, presented the Union Budget 2024-2025 on July 23. Significant changes were made to various areas, including the real estate sector. From the removal of indexation benefits to an increase in the limit of capital gains tax to Rs. 1.25 lakhs per year, let’s understand how the Union Budget affects the real estate industry.
Removal of Indexation Benefit
The Finance Minister proposed the elimination of indexation benefits. Previously, indexation benefited property owners as they were able to adjust their property purchase price as per inflation. Removal of indexation benefits will mean that property owners will no longer have the option to reduce their taxable profits.
Here’s a bit about indexation benefits. For inflation, indexation adjusted the purchase price of an asset, which reduced the capital gains and, hence, the tax liability. The indexed cost of acquisition is calculated using the Cost Inflation Index (CII) provided by the government every year.
The indexed cost and capital gains are calculated as per the following formula:
Indexed Cost = (CII in the year of sale / CII in the year of purchase) × Purchase Price
Capital Gains = Selling Price − Indexed Cost
Tax = 20% of Capital Gains
Tax on LTCG from 20% to 12.5%
Before the 2024 budget, a tax of 20% was levied on long-term capital gains. Now, the FM has announced a reduced tax rate of 12.5% on all financial and non-financial assets.
Further, for the benefit of lower and middle-income classes, the limit of exemption of capital gains on certain financial assets is increased to Rs. 1.25 lakh per year, which was previously Rs. 1 lakh per year.
To put it simply, a rationalized tax of 12.5% will be applicable to capital gains. One would not be able to reduce the taxable profits as per inflation, i.e., there will be no indexation benefits.
The removal of indexation and the decrease in the rate to 12.5% can have both positive and negative effects. Now, the tax will be applied directly to the difference between property sale cost and property purchase cost. Inflation will not have any effect. Hence, the tax amount can increase significantly.
Citing an example to understand the change after Budget 2024
Before Budget 2024:Purchase Price in 2011 = Rs. 20,00,000
Selling Price in 2020 = Rs. 40,00,000
CII in 2011-2012 = 184
CII in 2020-2021 = 301
Indexed Cost = (301/184) x Rs. 20,00,000
Indexed Cost ≈ Rs. 32,71,740
Captial Gains = Rs. 40,00,000 - Rs. 32,71,740
Captial Gains = Rs. 7,28,260
A 20% tax applies on this amount instead of Rs. 20,00,000 (Rs. 40,00,000 - Rs. 20,00,000)
∴ Tax amount = Rs. 1,45,652
After Budget 2024:Purchase Price in 2011 = Rs. 20,00,000
Selling Price in 2020 = Rs. 40,00,000
Capital Gains = Rs. 40,00,000 - Rs. 20,00,000
Capital Gains = Rs. 20,00,000
A tax of 12.5% will be applicable on this amount.
∴ Tax amount = Rs. 2,50,000
Encouraging States to Reduce Stamp Duty
The Finance Minister also announced that the centre will encourage states that continue to charge high stamp duty to moderate the rates for all. Also, the centre has asked to consider further lowering duties for properties purchased by women. This reform will be made an essential component of the urban development scheme.
Summing Up
The Union Budget 2024-2025 has introduced significant changes impacting the real estate sector, including the removal of indexation benefits and a reduction in the long-term capital gains tax rate from 20% to 12.5%. These changes can have both a positive and a negative impact on the real estate industry.
Additionally, the capital gains tax exemption limit has been increased to ₹1.25 lakh annually. Lastly, the government is encouraging states to lower stamp duty rates, particularly for properties purchased by women, as part of urban development reforms.
