Capital Gain Tax on Property After Modi 3.0’s Budget 2024-25. Here's All You Need to Know

As a result, the Indian real estate market particularly has reached an unprecedented peak in home sales, according to ANAROCK, a leading international property consultant. In some cities and pockets therein, owners and investors have benefited from decent capital appreciation or gains.

Speaking of capital gains from real estate property, in the full budget 2024-25 (presented on July 23, 2024) of the Modi 3.0 government, Finance Minister, Ms Nirmala Sitharaman has made changes to the capital gains tax. To learn more, watch this video:

[Read: Modi 3.0 Budget 2024-25: Here's How Ms Sitharaman's Proposals Impact Your Personal Finance]

First, note that the holding period shall determine what will be construed as a Short Term Capital Gain and a Long Term Capital Gain.

If the real estate property sold is less than 24 months from the date of its acquisition and if the sale/transaction is at a gain, it will be considered as a Short Term Capital Gain (STCG).

On the other hand, if the real estate property is held for a period of more than 24 months from the date of its acquisition till the date of selling/transferring, and if you have made gains, it will be referred to as a Long Term Capital Gain (LTCG).

In the full budget 2024-25, Ms Sitharaman has made it clear that all non-financial assets will have to be held for at least two years (i.e. 24 months) to be classified as long-term.

How Are Short Term Capital Gain Tax on Property Taxed?

The budget 2024-25 stated that all non-financial assets, which include real estate, shall continue to attract the applicable tax rate.

In other words, the STCG on property will now (with effect from July 23, 2024), be taxed as per your, the assessee's, income-tax slab, i.e. at the marginal rate of taxation. So, if you are in the higher income-tax slab bracket, you pay higher tax, plus the applicable surcharge and health & education cess.

[Read: New Tax Regime v/s Old Tax Regime: Which One Should You Opt for]

How Are Long Term Capital Gain Tax on Property Taxed?

The full budget 2024-25 has done away with the indexation benefit on long-term capital gains all on financial and non-financial assets.

The indexation benefit, which was used in computing the indexation cost of acquisition of the real estate property as well indexed cost of the improvement (if any) by accounting for inflation, reduced the LTCG tax liability.

Now the LCTG made on the real estate property (a non-financial asset) will be taxed at a flat 12.5% (plus the applicable surcharge and health & education cess), with no indexation benefit available (instead of 20% earlier with indexation benefit available).

Do you, the assessee really stand to benefit from this change? Let's find out with the help of two illustrations.

In the first example, say you purchased an apartment on January 1, 2010, costing Rs 50 lakh. You sold this apartment on July 24, 2024, for a value of Rs 1.65 crore. Here's how much Long Term Capital Gain tax regime you have to pay now.

It's evident that you, the assessee, will now have to pay more LTCG tax even at a 12.5% rate with the indexation benefit gone.

Now coming to the second example. Say, you bought the apartment before the year 2001 - to be precise on January 1, 1999, for Rs 25 lakh. You sold this apartment on July 24, 2024, for a value of Rs 1.65 crore. Here's how much capital gain tax you will need to pay.

In this case, you stand to benefit. The government has clarified that for properties purchased/acquired/inherited before 2001, the indexation benefit will continue. To compute the index cost of acquisition, the April 2001 Cost of Inflation Index (CII) value will be considered as the base, and the Long Term Capital Gain (sale value - the indexed cost of acquisition) will be taxed at 12.5% instead of 20% earlier.

Update: The government has moved an amendment to the Finance Bill 2024, allowing you the taxpayer to select either 12.5% long term capital gain tax (LTCG) on the property without indexation benefit OR pay 20% LTCG tax by availing of the indexation benefit for all real properties acquired before July 23, 2024 (i.e. the date from which the union budget 2024-25 has come into force), instead of the earlier cut of April 2001.

Note, that this revision has come from the finance ministry after concerns expressed by the real estate industry body over the removal of the indexation benefit on LTCG. The indexation will now allow the taxpayers to avail of the inflation impact, which shall reduce the LTCG tax outgo but will be available on property purchased before July 23, 2024. In other words, if you have bought the property on or after July 23, 2024, there is no choice but to pay a flat 12.5% LTCG tax.

In other words, those holding properties (purchased or inherited) before July 23, 2024, stand to benefit from the revised 2024-25 budget proposal on capital gain tax, while the new property owners -- those who purchased the property on or after July 23, 2024 -- will now have to pay more Long Term Capital Gain tax with no indexation benefit available.

Are There Ways to Avail of Capital Gain Tax Exemption?

Yes, the Income Tax Act, 1961 allows certain exemptions under relevant Sections, which, if used legitimately, can save you from the axe of tax.

Section 54 grants exemption from the capital gain tax on the transfer/sale of residential house properties if you, as an individual or Hindu Undivided Family (HUF) assessee, invest the capital gains proceeds to purchase or construct another residential house in India.

The key condition is that within a period of one year before or two years after the date of transfer of the old house, the taxpayer should acquire another residential property or should construct a residential property within a period of three years from the date of transfer of the old house. In the case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).

With effect from April 1, 2023, the government has put a cap of Rs 10 crore to avail the maximum exemption on capital gains under Section 54. As per the current tax rule, if the cost of a new asset exceeds Rs 10 crore, the excess amount shall be ignored for computing the exemption under Section 54.

If the property sold is other than a house/residential property, the exemption can be availed as per the provisions of Section 54F.

The capital gain proceeds if invested within six months from the date of sale into tax-saving bonds issued by REC, NHAI, PFC, etc. shall allow an exemption under Section 54EC. The maximum one can invest in these bonds is Rs 50 lakh, and the lock-in period in these bonds is 5 years.

What If There is a Capital Loss?

In case the property is sold at a loss, i.e. the cost of acquisition is more than the sale value of the property, you bear the loss - whether Short Term Capital Loss or Long Term Capital Loss, as the case may be (depending on the holding period).

Do note that the Income Tax Act, 1961 permits you to carry forward and set off the loss against the head 'Capital Gain'.

The Long Term Capital Loss can be set-off only against Long Term Capital Gains, whereas, the Short Term Capital Losses are permitted to be set-off against both Long Term Capital Gains and Short Term Capital Gains.

In case you have not been able to set off the capital losses in the same Assessment Year, a carry forward is permitted up to 8 years for both Short Term as well as Long Term Capital Loss.

To conclude...

When you sell your property (or any asset for that matter) weigh the pros and cons carefully and assess the tax impact. It would be prudent to engage in prudent tax planning and claim exemption by reinvesting the money sensibly in the interest of your long-term financial well-being.

Be thoughtful in your approach when managing your finances.

Happy Investing!

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