by THO
There are no changes to the taxation of long-term capital gains (LTCG) derived from residential property in the new Income Tax Bill 2025.
For property acquired prior to July 23, 2024, the tax on such long-term capital gains tax (LTCG) is computed as lower of 12.5 percent (without indexation) or 20 percent (with indexation), plus applicable surcharge and cess.
“The existing provisions, including applicable tax rates, availability of indexation benefit options for resident individuals and HUF taxpayers, etc. remain unchanged,” says Suresh Surana, a Mumbai-based chartered accountant.
Long-Term Capital Gains On Sale Of Property
Let us understand how capital gains work in the case of sale of property. Where the property is held for more than 24 months prior to sale, it shall be considered as long-term capital asset and the gains arising out of sale thereof would be taxable as long-term capital gains (LTCG).
“The LTCG will be arrived at after deducting the cost of acquisition, cost of improvement and expenditure wholly incurred in connection with the sale, from the gross sale consideration,” says Parizad Sirwalla, Partner and Head, Global Mobility Services, Tax, KPMG in India.
Let us say that a property is being sold for ₹1 crore. If the property was purchased for ₹50 lakh, improvements worth ₹10 lakh were made, and ₹2 lakh was spent on sale-related expenses, the total deductions would amount to ₹62 lakh. Therefore, the LTCG would be ₹1 crore (selling price) minus ₹62 lakh (total deductions), resulting in capital gains of ₹38 lakh.
Understanding Indexation
Here, it is important to understand the concept of indexation. Indexation is a tax benefit that adjusts the purchase price of a long-term capital asset for inflation using the Cost Inflation Index (CII), thereby reducing taxable capital gains. It applies to assets like real estate, gold, and certain financial instruments.
The indexed cost of acquisition is calculated by multiplying the purchase price by the Cost Inflation Index (CII) of the sale year and then dividing it by the CII of the purchase year. As a result, the indexed cost of acquisition increases the original cost, thereby reducing the taxable gain.
For example, if you bought a property for ₹20 lakh in 2010 and are selling it for ₹50 lakh in 2024, the indexed cost adjusts the original price for inflation. If the Cost Inflation Index (CII) for 2010 is 167 and for 2024 is 363, the indexed cost is calculated as ₹20 lakh × 363 ÷ 167, which equals ₹43.53 lakh. So, the capital gain is ₹50 lakh (sale price) – ₹43.53 lakh (indexed cost) = ₹6.47 lakh, instead of ₹30 lakh. This reduces the tax you need to pay.
“This benefit is only available to resident individuals and HUFs and they can evaluate whether this is beneficial to them from the perspective of Long Term Capital Gains (LTCG) tax as compared to LTCG computed without taking indexation benefit,” says Surana.
How Long-Term Capital Gains Taxes Work
If a taxpayer/ assessee sells a residential property in India, the resulting gains are taxable under Section 112 of the Income Tax Act, 1961 (Section 197 of the Income Tax Bill, 2025). The applicable tax treatment is as follows:
Where the sale has been effected prior to 23 July 2024, the tax on such long-term capital gains (LTCG) is computed at 20 percent (with benefit of indexation of cost), plus applicable surcharge and cess.
Where the sale has been effected on or after 23 July 2024, the LTCG depends on when the property was acquired.
“For property acquired prior to 23 July 2024, the tax on such LTCG is computed as lower of 12.5 percent (without indexation) or 20 percent (with indexation), plus applicable surcharge and cess. For property acquired on or after 23 July 2024, the tax on such LTCG is computed at 12.5 percent (without indexation), plus applicable surcharge,” says Sirwalla.
Let us take an example to understand this better.
Let us say you purchased a house on 2 April 2001 for ₹10,00,000. You sell it on February 24, 2025 for ₹50,00,000.
As sale has been effected on or after 23 July 2024 and purchase is prior to this date, the tax on such LTCG [ ₹50,00,000 – ₹10,00,000 = ₹40,00,000] is computed as lower of following:
12.5 percent (without indexation) LTCG – ₹50,00,000 – ₹10,00,000 = ₹40,00,000 Tax @ 12.5% = ₹5,00,000.
Or
20% (with indexation)
Indexed cost: Rs10,00,000 X 363/ 100 (CII for FY 2024-25) / CII for FY 2001-02)= ₹36,30,000.
Capital Gains For Calculation purpose: ₹50,00,000 – ₹36,30,000 = ₹13,70,000.
Tax @ 20% = ₹2,74,000
As ₹2,74,000 is the lower of the two, the tax payable on the LTCG of ₹40,00,000, shall be restricted to ₹2,74,000 (plus surcharge).
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics
