Lower LTCG Rate and Abolition of Indexation: A Benefit or a Disadvantage?

The removal of the indexation benefit for calculating LTCG tax on investments like real estate and gold can either increase or decrease tax liability, depending on asset returns and holding periods.

The impact of removing the indexation benefit while calculating long-term capital gains (LTCG) tax on investments like real estate and gold is subjective and depends on factors such as asset returns and holding periods. As per rough calculation, higher returns from assets will benefit from the reduced tax rate, while lower returns will result in higher tax liability without the indexation benefit. Lets understand the impact with different scenario.

Higher Returns Scenario

Scenario 1: Higher Return

Let's suppose you bought a property for Rs 1 crore in 2001, and its value increased by 10% annually over the last 24 years, reaching ₹10.75 crore in 2024-25.

Existing Rules with Indexation:

Indexed Cost of Acquisition = Rs 3,63,00,000 [Rs 1,00,00,000 x (CII 363 / CII 100)].

LTCG = Rs 7,12,00,000 (Rs 10,75,00,000 – Rs 3,63,00,000).

Tax Liability at 20% = Rs 1,42,40,000.

New Rules without Indexation:

LTCG = Rs 9,75,00,000 (Rs 10,75,00,000 – Rs 1,00,00,000).

Tax Liability at 12.5% = Rs 1,21,87,500.

Savings under New Rule: ₹20.5 lakh.

Also read | Income tax slabs revised, standard deduction raised from Rs 50,000 to Rs 75,000 under the new tax regime in Budget 2024

Lower Returns Scenario

Scenario 2: Lower Return

Let's suppose you bought a property for Rs 1 crore in 2001, and its value increased by 6% annually over the last 24 years, reaching Rs 4.17 crore in 2024-25.

Existing Rules with Indexation:

Indexed Cost of Acquisition = Rs 3,63,00,000 [Rs 1,00,00,000 x (CII 363 / CII 100)].

LTCG = Rs 54,00,000 (Rs 4,17,00,000 – Rs 3,63,00,000).

Tax Liability at 20% = Rs 10,80,000.

New Rules without Indexation:

LTCG = Rs 3,17,00,000 (Rs 4,17,00,000 – Rs 1,00,00,000).

Tax Liability at 12.5% = Rs 39,62,500.

Additional Tax under New Rule: Rs 28.82 lakh.

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MoneyControl Take

The removal of the indexation benefit for calculating LTCG tax on investments like real estate and gold can either increase or decrease tax liability, depending on asset returns and holding periods. Higher returns generally benefit from the reduced tax rate, while lower returns result in higher tax liability without indexation.

Also read | Finance Minister declines clarity on future of old tax regime

Higher Capital Gains

Under the new rules, in any scenario, investors will end up with higher capital gains amount due to the investment amount not being adjusted for inflation under the new rules. This can disadvantage those planning to save LTCG tax by reinvesting gains in residential property or 54EC bonds, which have higher limits.

• 54EC Bonds: Maximum investment is Rs 50 lakh per annum.
• Residential Property: Exemption is available for two houses, with a capital gain limit of Rs 2 crore, applicable once in a seller's lifetime.