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Amongst the total 85 proposed Budget amendments in the Finance (No.2) Bill, 2024, the amendment in respect of the taxability of long-term capital gains (LTCG) income arising on sale of an immovable property (land and building), w.e.f. 23.7.2024 and onwards, has caught the attention and interest of everyone. In this piece I have tried to decode all the nuances of this critical budget amendment with practical calculations.

Proposed Amendment in the Finance (No. 2) Bill, 2024

The Finance (No.2) Bill, 2024, proposes to reduce the tax rate on long-term capital gains arising on sale of immovable property (land and building) from 20% to 12.5%, w.e.f. 23.7.2024. However, at the same time, the existing indexation benefit available under second proviso to section 48 of the Income Tax Act, has been withdrawn.

Break Even Point Analysis of Indexation in Pre-Budget Regime vs. Reduced LTCG Tax Rate in Post Budget Regime

The impact assessment of proposed amendment in Union Budget 2024-25, pertaining to reduction in long term capital gain tax rate from 20% to 12.5% but simultaneous removal of indexation benefit can be understood with the help of a Break-Even Point Analysis of trade-off between the Indexation benefit available in pre-budget regime and the benefit of reduced LTCG rate of 7.5%.

The comparative analysis of the taxpayer’s tax liability in respect of LTCG on sale of house property, under the existing provisions of the Income Tax Act, and after the proposed budget amendments, in different scenarios, is tabulated as under:

* Break Even Point Sale Consideration/ Price Appreciation

** Sale Consideration/Price Appreciation lesser than Break-Even Point

Therefore, based on the above Break-Even Point analysis, the post budget amended provisions of taxability of long-term capital gains of reduced rate of 12.5% without indexation, will become more beneficial to the taxpayers, as compared to the pre-budget regime, if the appreciation in the valuation of their properties is more than the above tabulated break-even points of property appreciation, at different levels of holding period. Conversely if the price appreciation is lesser than the break-even point, pre-budget regime is coming out more beneficial.

Thus, if a person has purchased a house property worth Rs. 1 crore in AY 2014-15, and intends to sell-off the same, on 24.7.2024, then he will have to pay lesser tax on his LTCG income, in the post budget regime, if the sale consideration of the property exceeds Rs. 2.40 crores. However, if the sale consideration of the property is less than Rs. 2.40 crores, then he has to shell out more LTCG tax as compared to the pre-budget regime.

Thus, in conclusion, the minimum price appreciation needed in property prices, for the post budget regime of taxability of long-term capital gains of reduced rate of 12.5% without indexation, to become more beneficial to the taxpayers is summarised as under:

The minimum Compound Annual Growth Rate (CAGR) needed for such break even during the holding periods of 5 to 24 years (supra), ranges between 9% to 11.2%. As per the various Research Reports available on internet, the current average CAGR in Real Estate market in India hovers around 14-15%. Thus, barring exceptional cases, where the appreciation in property prices is below the above tabulated break-even points of CAGR, the post budget amended provisions may infact turn out to me more beneficial to the taxpayers. 

[This Article has also been published in Taxmann with the citation [2024] 164 taxmann.com 589]