The area of the house proposed to be sold is 1725.9 sq.ft and the sale price is Rs 1.72 crore to be shared equally between my elder sister and myself. The circle rate as on 01.04.2001 was Rs 3400 per square metre and the present circle rate April 2024 is Rs 19000 per square metre. The Indexation as on 01.04.2001 was 100,whereas in 2024-25 it’s 363. Please note the area of the house proposed to be sold is in square feet, whereas the circle rate is in square metres. Kindly let me know the capital gain tax implications on the sale of the property and how much I have to invest in order to save tax.
Reply by Sujit Bangar, Founder Taxbuddy.com
Selling a property involves understanding of capital gains tax implications, especially after the changes introduced in the Union Budget 2024-25. Here is an explanation on the capital gains tax calculations for your property sale, covering scenarios with and without indexation under the revised tax regime.
Tax Updates Post-Budget 2024
The Budget 2024-25 introduced significant changes to the capital gains tax regime. The Long-Term Capital Gains (LTCG) tax rate has been standardized at 12.5%, down from the previous 20%, and the Short-Term Capital Gains (STCG) tax rate has increased to 20% for listed assets.
However, in response to public feedback, the government allow taxpayers who purchased property before July 23, 2024, to choose between:
Paying a 12.5% LTCG tax without indexation, or
Paying a 20% LTCG tax with indexation.
These changes simplify the tax structure while impacting property sellers differently.
Calculation of Capital Gains with Indexation
Cost of Acquisition (2001):
Cost of Acquisition = Circle Rate (2001)×Area (in sq.m)
Cost of Acquisition = Rs 3,400 × 80.17 = Rs 2,72,578
Indexed Cost of Acquisition: Using the Cost Inflation Index (CII):
Indexed Cost = Cost of Acquisition × CII (2024-25) / CII (2001-02)
Indexed Cost = Rs 2,72,578 × 363 / 100 = Rs 9,89,453
Long-Term Capital Gain (LTCG):
Capital Gain (with Indexation) = Sale Price − Indexed Cost
Capital Gain = Rs 86,00,000 – Rs 9,89,453 = Rs 76,10,547
Tax on LTCG (20%):
Tax Liability=Rs 76,10,547×20%= Rs 15,22,108
B ) Calculation of Capital Gains without Indexation
Capital Gain (without Indexation):
Capital Gain = Sale Price − Cost of Acquisition
Capital Gain = Rs 86,00,000 − Rs 2,72,578 = Rs 83,27,422
Tax on LTCG (12.5%):
Tax Liability = Rs 83,27,422 × 12.5% = Rs 10,40,928
In this particular case, without indexation the LTCG tax comes to Rs 10,40,928 and with indexation it comes to Rs 15,22,108 .
Tax-Saving Options
To reduce or avoid paying capital gains tax, the following strategies can be employed:
Reinvest in Residential Property (Section 54):
By reinvesting the capital gain (Rs 76,10,547 with indexation or Rs 83,27,422 without indexation) in a new residential property, you can claim a full exemption. The reinvestment must be made within 2 years for purchase or 3 years for construction.
Invest in Capital Gains Bonds (Section 54EC):
You can invest up to Rs 50,00,000 in tax-saving bonds issued by REC or NHAI within 6 months of the sale. These bonds come with a 5-year lock-in period, and the remaining capital gain (if any) will be taxable
Tax Liability Without Indexation After Investing in Section 54EC Bonds
If you choose not to apply indexation and instead calculate capital gains based on the actual cost of acquisition, the total capital gain amounts to Rs 83,27,422. By investing Rs 50,00,000 in tax-saving bonds under Section 54EC (e.g., REC, NHAI), you can reduce the taxable portion of the gain to Rs 33,27,422.
Under the revised tax regime, long-term capital gains (LTCG) are taxed at 12.5%. The tax on the remaining taxable gain of Rs 33,27,422 is calculated as:
Tax Liability = Rs 33,27,422 × 12.5% = Rs 4,15,928
By utilizing Section 54EC, your total tax liability is reduced significantly from Rs 10,40,928 to Rs 4,15,928, saving Rs 6,25,000 in taxes. However, remember that the Rs 50,00,000 investment in bonds will be locked in for 5 years.
This approach allows you to retain some of your proceeds while effectively leveraging tax-saving mechanisms. It’s a useful strategy for balancing liquidity needs with tax savings.
Assumption: The basic exemption limit is already exhausted by other income sources amounting to Rs 3,00,000.
Note: The calculations provided are based on a single individual, as the figures have been divided equally between two people.
Note: LTCG is taxed at a flat rate of 20% with indexation benefit in case of sale made on or before 23rd July, 2024. For sale of land and building after 23rd July, 2024, taxpayer has either of the above options to opt, provided purchase is made on or before 22nd July, 2024)
Note: CESS + Surcharge + Interest not considered in the calculation.
(The views of the tax/investment experts are their own and not that of Business Today. Readers are encouraged to consult a tax consultant or qualified financial advisor or a SEBI-registered investment advisor before making any decision)