Date: August 27, 2024 Author: Team Piramal Realty

Long-Term Capital Gains (LTCG) Tax on Property: Understanding Changes in 2024

There are a variety of assets that an individual can invest in India to gain good profits. These may include stocks, mutual funds, bonds, derivatives, commodities, etc. While all these investment instruments are extremely popular, real estate investment accounts for the maximum share of a typical Indian household. However, every real estate investor should remember that capital gains or profits generated from selling real estate properties in India are not entirely tax-free. As per the income tax laws of India, capital gain on the sale of property attracts an income tax at a specified rate. This rate is decided as per the nature of the property and the duration for which the investor held it before it was sold.

The sale of immovable property can lead to significant capital gains, subject to taxation under the Income Tax Act 1961. Knowing the rules surrounding long-term and short-term capital gains tax is essential for individuals engaged in real estate transactions. The Union Budget 2024 has brought key updates to capital gains taxation, altering how taxpayers calculate their liabilities. This article provides a comprehensive guide on the new LTCG tax rules on property, their implications, and the calculation process, with updated information for 2024.

What are Capital Gains?

Capital gains refer to the profit earned from the sale of an asset, including real estate. These gains are categorised into:

Short-term Capital Gains (STCG): When a property is sold within 24 months of acquisition.
Long-term Capital Gains (LTCG): When a property is held for more than 24 months before selling.

Changes Introduced in Budget 2024

The Union Budget 2024 has brought crucial changes to LTCG taxation, effective from FY 2024-25:

Change	Details
Revised Holding Period	The holding period to classify assets as long-term is now standardized at more than 24 months for immovable property.
Removal of Indexation for New Purchases	The indexation benefit is no longer available for properties acquired on or after July 23, 2020.
Lower Tax Rate Without Indexation	A reduced tax rate of 12.5% applies to long-term capital gains without indexation for properties acquired after July 23, 2024. Properties acquired before this date can opt for a 20% tax rate with indexation.

What is a Long-Term Capital Gain Tax on Property?

As per the Income Tax Act of 1961, if an investor holds a real estate property for more than two years or 24 months, the profits or returns generated from it are termed long-term capital gains or LTCG. The income tax applicable to selling such properties is the long-term capital gains tax.

Below are a few points that one should remember while calculating the LTCG tax on property:

The taxpayer can subtract the commission or brokerage paid to an agent while calculating the taxable amount for long-term capital gain tax on property.
The taxpayer can also deduct any additional expense incurred for home improvement or construction while holding the property.
The taxpayer can claim certain tax exemptions under sections 54, 54B, and 54EC while evaluating the LTCG amount.

Understanding Tax Rates on Capital Gains

The tax rate differs for short-term and long-term gains. Here's a summary:

Particulars	STCG on Property	LTCG on Property
Tax Rates	Slab rate	(i) 20% with indexation (for sales before July 23, 2024) (ii) 12.5% without indexation (for sales on or after July 23, 2024)
Holding Period	Less than 24 months	More than 24 months

What is a Short-Term Capital Gain Tax on Property?

If an investor held a real estate property for less than 24 months before it was sold, the return or profit generated from its sale is known as short-term capital gains or STCG. The income tax levied on short-term capital gain is known as short-term capital gain tax.

Like LTCG tax, an individual can subtract the brokerage amount and home improvement costs while calculating the taxable income for short-term capital gain tax on property.

Long-Term Capital Gain (LTCG) tax rules for different categories

Here’s a detailed look at the long-term capital gain tax rules for varied categories -

Option	Tax Rate	Indexation	Description
12.5% Tax Rate	12.5%	Not Available	Lower tax rate but does not account for inflation, affecting real purchasing power.
20% Tax Rate with Indexation	20%	Available (using CII)	Higher tax rate but allows adjustment for inflation, reducing taxable gains.

Latest Changes and Revisions

The most recent updates are as follows -

Update/Amendment	Details
Revised CII	CII for long term capital gain tax on sale of property for AY 2023-24 is 348, which is to be used for indexation in capital gains calculations.
Enhanced Penalties	Higher penalties for under-reporting and misreporting income; accurate LTCG reporting is essential.
New Bonds under Section 54EC	Introduction of new bonds, offering more investment options for capital gains exemption.
Online Filing Requirements	Streamlined digital process; ensure all documents and proofs are uploaded when filing online.

Tax Exemptions on Long-Term Capital Gains

The Income Tax Act provides several exemptions under sections 54, 54EC, and 54F to reduce the taxable long-term capital gains. These exemptions encourage reinvestment in certain types of assets.

Exemption Section	Conditions for Exemption
Section 54	Exemption if LTCG is reinvested in a new residential property within two years or construction within three years.
Section 54EC	Exemption if LTCG is reinvested in bonds issued by NHAI, REC, or similar entities within six months.
Section 54F	Applicable when the entire sale proceeds from non-residential property are reinvested in one or two new residential properties within a stipulated time frame.

Strategic Considerations for Taxpayers

Here’s what should be kept in mind -

Choice of Tax Regimes	Considerations
12.5% without Indexation	Beneficial for properties acquired after July 23, 2024, as no adjustment for inflation is available. Suitable if inflation remains low during the holding period.
20% with Indexation	Ideal for properties acquired before July 23, 2024, where inflation-adjusted costs can significantly lower taxable gains. Suitable for high-inflation periods.

Key Changes & Takeaways

The 2024 updates to the LTCG tax have simplified the holding period but eliminated a crucial advantage of indexation for new property purchases. Investors must consider these changes when planning property sales:

Removal of Indexation: Eliminates the ability to adjust costs for inflation for properties bought after July 23, 2024.
Lower Tax Rate: A reduced rate of 12.5% can be advantageous, but effective taxation may be higher than the previous regime in certain cases without the inflation adjustment.
Strategic Planning: Individuals must now weigh the benefits of selling property before or after the specified date, depending on which option minimises tax liabilities.

To Sum it Up

Handling the complexities of long-term capital gains tax on property sales requires careful planning. The 2024 tax reforms have introduced a lower tax rate but eliminated indexation for new purchases, fundamentally changing the tax scenario. Whether opting for a flat 12.5% rate or using older indexation benefits, taxpayers must assess their financial circumstances and plan transactions accordingly. Consulting with tax professionals is advisable to ensure compliance and optimise tax savings.

Frequently Asked Questions

How much long-term capital gain is tax-free?➕

Gains of up to ₹ 1.25 lakh per annum from equity investments are not subject to capital gains tax.

What is the tax on long-term capital gains section?➕

The tax on long-term capital gains falls under two sections: 12.5% without indexation or 20% with indexation, allowing adjustment for inflation using the Cost Inflation Index.

How Do I Avoid Short-Term Capital Gains Tax?➕

Hold the asset for more than 36 months to avoid short-term capital gains tax or invest in tax-saving options like Section 54EC bonds after selling.

Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.