New Rules for Property Sale Gains: What Buyers and Sellers Should Know

An important change has been made by the Union Budget 2024 in long-term capital gains (LTCG) for the taxation of selling property like land or buildings. Earlier, if someone sold a property held for more than two years, they were able to reduce their taxable gains through the adjustments of cost of purchase and improvement using something called the Cost Inflation Index (CII). This helped them account for inflation and the rest gain was taxed at 20%.

The use of CII is to make sure that taxes are paid only on the real profit earned and not on the price increase caused by the inflation.

But starting from 23 July 2024, this benefit of adjusting the cost for inflation will no longer be available for properties bought on or after that date. The tax rate has been also lowered to 12.5%. However, sellers can no longer adjust the property’s cost with inflation resulting in payment of more tax even after the rate is lower.

The government later made a change in Section 112 of the Income Tax Act, after receiving a lot of criticism from the public. A special rule was added which provides some people the option to choose between the old and new tax system. It is known as “Grandfathering”, which can be used only after certain requirements are met:

• The seller must be a resident individual or a Hindu Undivided Family (HUF)
• The gain should be from the sale of a building, land or both
• The property must be purchased before 23 July 2024
• The sale must take place on or after 23 July 2024

If all these conditions are met, the seller can choose between the two:

• Either pay 12.5% tax without using inflation adjustment
• Or pay 20% tax with inflation adjustment

The benefit of using inflation adjustment is completely removed for those properties which are bought on or after 23 July 2024. The profits will be calculated as same as the short-term capital gains, based only on the profits without the consideration of inflation.

This change is meant to remove unfairness and make tax system easier. People who are planning to sell their property should understand these rules properly and make the right choice accordingly to avoid paying more tax than required.