I-T department says reduction of the capital gains tax on property will benefit most customers, but social media users question "unrealistic" return projections.
The Income tax department on July 24, 2024, said that the Union Budget proposal of changing the capital gains rate from 20 per cent (with indexation) to 12.5 per cent (without indexation) will benefit most customers in real estate. It admits that for customers with returns less than about 9-11 per cent per annum, the new tax system will be expensive.
"The reduction in long-term capital gains tax rate from 20 per cent with indexation to 12.5 per cent without indexation for real estate will benefit in almost all cases," the I-T Department posted on X platform.
The Budget proposed to remove the indexation benefit for calculating long-term capital gains on property, gold, and other unlisted assets, and to apply a 12.5% capital gains tax on these assets instead of the previous 20%. Indexation benefits for properties bought before 2001 will continue.
The tax department said, "Nominal real estate returns are generally in the region of 12-16 per cent per annum, much higher than inflation. The indexation for inflation is in the region of 4-5 per cent, depending on the period of holding. Therefore, substantial tax savings are expected to a vast majority of such taxpayers."
"The new tax rate without indexation is beneficial in most cases. For property held for 5 years, the new regime is beneficial when the property has appreciated 1.7 times or more. For property held for 10 years, it is beneficial when the value has increased to 2.4 times or more. For property purchased in 2009-10, if value has increased to 4.9 times or more, it is beneficial," the I-T Department added.
But the I-T Department's argument comes with a caveat, "Only where returns are low (less than about 9-11 per cent per annum) that the earlier tax rate is beneficial, but such low returns in real estate are unrealistic and rare."
But users on X retorted saying the returns projected by the tax department are not realistic. One user said, "Which flat in which city has an annual appreciation rate of what you say after 10 years? 12-16% annual return isn't there even in top tier cities."
"Where do you have a property that increased 2.4 times in the last 10 years?" another user said.
I-T Department gave several cases in this regard to illustrate the tax in both scenarios.
Property bought before 15 years
For instance in 2009-10, if the cost of acquisition of a property was Rs. 100, and the cost inflation index (CII) for that year was 148. In 2024-25, the CII was 363, and the indexed cost of acquisition was Rs. 245.
Then if he sold the property in 2024 for a sale value of Rs. 700, it yielded a capital gain of Rs. 455 (Rs 700 minus Rs 245) and a tax of Rs. 91 under the old system, while under the new system, without indexation the capital gains was Rs. 600 and the tax was only Rs. 75. It thus gave several instances bringing sales value down up to Rs 490, but still the new tax system showed beneficial for investors.
With a Cost Inflation Index (CII) for FY 2014-15 at 240, here the indexed cost of the acquisition came to be Rs. 151 for property bought 10 years at Rs 100. If the sale value in 2024 was Rs. 400 at a return of 14.9 per cent, the capital gain would be Rs. 249, with a corresponding tax of Rs. 49.8 in the old tax system. But the new tax only shows a tax outgo of Rs. 37.5.