Budget 2024: How New Capital Gains Tax Affects Home Buyers Who Purchased Before 2001

An overhaul of the convoluted capital gains tax regime in Budget 2024 has resulted in a change in the taxation of gains from sale of residential real estate with effect from Tuesday. There was a reduction in the tax rate, but indexation benefits, which were calculated starting 2001, were done away with. What does this mean for property bought before 2001?

First, here’s how the change in capital gains tax treatment affects residential real estate: Prior to Budget 2024, capital gains on houses were taxed at 20%, with indexation benefits. The indexation benefits allowed the seller of real estate to adjust for the impact of inflation when calculating capital gains. Effectively, the capital gains on the property net of the impact of inflation was taxed at 20%.

The inflation impact was calculated based on the Cost Inflation Index published by the Central Board of Direct Taxes on an ongoing basis. The base of the index was set as April 1, 2001, with the value at 100.

As an illustration, assume you bought property worth Rs 1 crore in 2005. As of April 2024, the property was sold for Rs 4 crore. As per the old treatment of capital gains, the indexation benefit would reduce the gain of Rs 3 crore to Rs 89.74 lakh. And the tax payable, at 20%, would be around Rs 18 lakh.

In the second illustration, assume you bought property worth Rs 50 lakh in 1995. The ‘fair value’ of this property, as on April 1, 2001 stood at Rs 80 lakh. This fair value was used to determine the capital gains, as per the earlier tax treatment. In this case, if the property was sold at Rs 4 crore in April this year, your capital gains, adjusting for indexation, would have stood at Rs 1.1 crore. And the tax would have stood at Rs 21.92 lakh at 20%.

Let’s look at how these same illustrations would change your tax payable, based on the change announced in Budget 2024.

In the first illustration, assuming you sold the property at Rs 4 crore today, the gain of Rs 3 crore would be taxed at a flat rate of 12.5% and the tax payable would be Rs 37.5 lakh.

The confusion is arising with property bought before 2001. In an interview with NDTV Profit on Tuesday, Revenue Secretary Sanjay Malhotra clarified that those who bought property before 2001 would still be entitled to indexation benefits up to 2001.

The interpretation, based on the current Finance Bill, is that for property bought before 2001, the fair market value as on April 1, 2001 would be used to compute capital gains and would be taxed at 12.5%.

Here’s how that would look in the second illustration described above. Considering a fair value of Rs 80 lakh in April 2001, a property sold for Rs 4 crore today would attract a capital gains tax of Rs 40 lakh at 12.5% on the gain of Rs 3.2 crore.

“To sum up, any increase in property value from the original purchase price to the fair market value in April of 2001 is not taxable,” said Arvind Rao, founder of Arvind Rao & Associates. “The way in which the fair market value is calculated has not changed. Effectively, the stamp duty value as on April 1, 2001 is taken as the fair market value of the property.”