Individuals and Hindu Undivided Families (HUFs) have two options for calculating their long-term capital gains (LTCG) tax on sale of property – either pay a 12.5% tax on LTCG without indexation benefits or a 20% tax with indexation benefits.
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Earlier in the Union Budget for 2024-25, the government eliminated the indexation benefit for the sale of immovable property. However, this decision was later reversed with an amendment to the Finance Bill 2024.
The amendment to the Finance Bill has reinstated the indexation benefit for properties acquired before July 23, 2024. As a result, individuals and Hindu Undivided Families (HUFs) who purchased residential or commercial real estate before this date now have two options for calculating their long-term capital gains (LTCG) tax: they can either pay a 12.5% tax on LTCG without indexation benefits or a 20% tax with indexation benefits.
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Shefali Mundra, Tax Expert at ClearTax, provides insights into capital gains tax calculations for land sales. She explains the nuances of these calculations and discusses various aspects related to changes in indexation rules.
“Calculating capital gains tax on the sale of land can be intricate, especially with recent amendments in the Budget 2024. Changes in indexation rules and tax rates have introduced new considerations for property transactions,” Mundra said, adding that understanding these amendments is crucial for accurately assessing your tax liability and making informed decisions about your investments.
In this article, she will be explaining the changes along with illustrations to make it easy for you to understand.
Capital gains arise if there is any profit/gain when you transfer a capital asset. Capital gains are classified into two types:
Long-Term Capital Gains (LTCG): Arise from transfer of assets held for more than 24 months.
Short-Term Capital Gains (STCG): Arise from transfer of assets held for 24 months or less.
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Budget 2024 amendments:
Previously, long-term capital gains were adjusted for inflation through indexation. Under Budget 2024, the indexation benefit for LTCG has been removed. The tax rate for LTCG has been reduced from 20% to 12.5%. However, the government has provided taxpayers with 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.
Calculate tax on LTCG if the property is sold for Rs 10,00,000 during FY 2024-25. The property was purchased at Rs 2,00,000 on June 2001.
Computation of LTCG with and without indexation benefit as per Budget 2024:
Here’s a simplified explanation of the table:
The table compares the tax implications of selling a property with and without indexation benefits.
Sale Consideration: This is the selling price of the property, which is Rs 10,00,000 in both scenarios.
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With Indexation Benefit:
Cost of Acquisition: Adjusted for inflation, this is Rs 7,26,000, calculated as Rs 2,00,000 multiplied by 363/100.
Long-Term Capital Gains (LTCG): The profit is Rs 2,74,000, which is the sale price (Rs 10,00,000) minus the adjusted cost of acquisition (Rs 7,26,000).
Tax: At a rate of 20%, the tax on LTCG is Rs 54,800. There is no option to calculate tax at 12.5% with indexation.
Without Indexation Benefit:
Cost of Acquisition: This remains at Rs 2,00,000, the original purchase price.
Long-Term Capital Gains (LTCG): The profit is Rs 8,00,000, which is the sale price (Rs 10,00,000) minus the original cost of acquisition (Rs 2,00,000).
Tax: At a rate of 12.5%, the tax on LTCG amounts to Rs 1,00,000. There is no option to calculate tax at 20% without indexation.
In summary, with indexation, the tax amount is lower, but you must use a 20% rate. Without indexation, the tax is higher at 12.5%.
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