When you sell an asset (in this case, real estate), a portion of the profit must be given to the government as capital gains tax.
This is classified as either Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG), depending on the duration of ownership.
Following the Union Budget 2024-25, there have been significant changes in the capital gains tax rates applicable to real estate investments in India:
Long-Term Capital Gains (LTCG):
The tax rate for LTCG on real estate has been reduced from 20% to 12.5%.
However, a crucial change is that the indexation benefit—which adjusted the purchase price of the property for inflation—has been removed for properties purchased after April 2001.
This means that while the tax rate has been lowered, investors may face higher tax liabilities due to the inability to factor in inflation.
Properties bought before 2001 still retain the indexation benefit, and sellers can use the fair market value as of 2001 for LTCG calculations.
Let’s say you bought a house for 10 lakhs a few years ago and are now selling it for 30 lakhs. Without indexation, your profit (or capital gain) is simply 20 lakhs (30 lakhs - 10 lakhs).
You would have to pay tax on this 20 lakhs.
With indexation, the government allows you to account for inflation (how prices increase over time). What 10 lakhs could buy 10 years ago can’t buy as much today because things have gotten more expensive. Indexation adjusts your original purchase price to reflect this change in the value of money.
So, instead of just using 10 lakhs, you adjust it to what 10 lakhs would be worth today because money loses value over time due to inflation. For example, 10 lakhs back then might be worth 20 lakhs in today's money.
After this adjustment, your buying price might be considered as 20 lakhs. Now, your profit (capital gain) is only 10 lakhs { 30 lakhs [ selling price ] - 20 lakhs [ purchase price adjusted with indexation] }, so you pay less tax.
Indexation helped in reducing your tax because it recognizes that the value of 10 lakhs years ago isn’t the same today. Now it is not more the case.
Short-Term Capital Gains (STCG):
The tax rate for STCG on real estate transactions (for properties held for less than 24 months) has been increased to 20% from the earlier rate of 15%.
End Note:
Investors with shorter holding periods (under 24 months) may see higher tax liabilities due to the increased STCG rate. Meanwhile, those with longer-term holdings may benefit from the reduced LTCG rate. However, the removal of the indexation benefit for properties purchased after 2001 could offset some of this advantage, potentially resulting in higher tax liabilities despite the lower LTCG rate.
