Real Estate Taxes: Everything You Should Know

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The taxation system for real estate now offers two choices: a long-term capital tax of 20% with indexation or a rate of 12.5% without indexation. The decision is entirely in your hands!

Taxation on Real Estate: Union Budget 2024
In the Union Budget for 2024, the esteemed Finance Minister, Smt. Nirmala Sitharaman announced that real estate transactions will now incur a long-term capital gains tax at a uniform rate of 12.5%. It’s important to note that this rate does not include indexation, meaning sellers cannot claim any indexation advantages alongside the lowered capital gains tax.

In simple terms, property owners have two options when selling their properties, allowing them to select the one with the lesser tax obligation:

Calculate tax on long-term capital gains from the sale of immovable property at 20% utilizing indexation benefits.
Calculate tax on long-term capital gains from the sale of immovable property at 12.5% without indexation benefits.
Taxation on Real Estate
New Announcement: Significant Relief for Real Estate
On 7th August 2024, the government announced that ...
... taxpayers can now opt for a lower tax rate of 12.5% without indexation or a higher rate of 20% with indexation. Consequently, taxpayers can pay the lesser of the two tax amounts.

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Which Properties May Choose Between the Two Tax Rates?

The ability to choose between the two tax rates applies to properties purchased before 23rd July 2024. Properties bought and sold after this date will be subject to a tax of 12.5% without the option of indexation.

Who Can Opt Between the Two Tax Rates?

Firstly, only individuals and Hindu Undivided Families (HUFs) can make this choice, provided the property is sold before 23rd July 2024.

Secondly, the tax rate options — either with or without indexation — are available for commercial and non-commercial properties.

Furthermore, owners cannot claim indexation on losses, meaning they cannot carry forward or offset any losses.

What Factors Should You Consider When Choosing Between the Two Tax Rates?

The following aspects should be contemplated when deciding between the two tax rates:

– The purchase price of the property

– The age of the property

– The growth in property value

– How long the property has been held, etc.

How to Calculate the Cost Inflation Index?

The formula for calculating the cost inflation index is:

Cost Inflation Index (CII) = CII for the year of asset transfer or sale / CII for the year of asset acquisition or purchase.

The scenario involves purchasing in 2001 and selling in 2024 with a purchase price of Rs 10,000,000; the CII in the purchase year is 100 and in the sale year is 363.

The examples provided make it clear that if a property’s appreciation exceeds the inflation rate, the preferable choice is the new tax rate of 12.5% without indexation. Conversely, opting for the old rate of 20% with indexation may be more beneficial if this is not the case.