Understanding Property LTCG Tax in FY2025-26: The 12.5% vs. 20% Choice
Thank you for reading this post, don't forget to subscribe!Starting July 23, 2024, the tax on long-term capital gains (LTCG) from property sales has been reformed. For resident individuals and HUFs, the new rules offer a significant choice: you can now choose the lower of two tax liabilities, providing a strategic advantage in managing your tax burden.
The Two Tax Options Explained
For properties acquired before July 23, 2024, you can choose between:
- 1. The New, Lower Rate (12.5% without indexation): This straightforward option taxes your gain at a flat 12.5%. You calculate the gain by simply subtracting the purchase price from the sale price. This method is often a better choice for properties bought more recently, as the effect of inflation on the original cost is minimal.
- Formula: Taxable Gain = Sale Price – Purchase Price. Tax = Taxable Gain × 12.5%.
- 2. The Traditional Rate (20% with indexation): This method continues to use the Cost Inflation Index (CII) to adjust your original purchase price for inflation. This inflated cost reduces your taxable gain, which is then taxed at the traditional 20% rate. This option is typically more beneficial for properties held for a long time, as indexation significantly lowers the taxable amount.
- Formula: Indexed Cost = Purchase Price × (CII of Sale Year ÷ CII of Purchase Year). Taxable Gain = Sale Price – Indexed Cost. Tax = Taxable Gain × 20%.
For properties acquired on or after July 23, 2024, only the 12.5% tax rate without indexation is applicable.
Which Option Should You Choose?
The optimal choice depends on the specifics of your property sale. Generally, the longer you have held the property, the more likely the 20% tax with indexation will result in a lower tax bill. Here are a few scenarios to illustrate this point:
- Scenario 1: Property bought long ago (2005)
- Details: Purchased at Rs 20 lakh, sold at Rs 1 crore.
- Comparison: The 12.5% tax results in a bill of Rs 10 lakh. However, with indexation, the taxable gain is much lower (Rs 38 lakh), resulting in a tax of just Rs 7.6 lakh.
- Conclusion: The 20% with indexation option is the clear winner.
- Scenario 2: Property bought recently (2019)
- Details: Purchased at Rs 80 lakh, sold at Rs 1 crore.
- Comparison: The 12.5% tax bill is Rs 2.5 lakh. With indexation, the indexed cost is nearly Rs 1 crore, making the taxable gain negligible and the tax almost Nil.
- Conclusion: The 20% with indexation option is significantly better, almost wiping out the tax liability.
- Scenario 3: Property bought at a higher price recently (2020)
- Details: Purchased at Rs 90 lakh, sold at Rs 1 crore.
- Comparison: The 12.5% tax results in a bill of Rs 1.25 lakh. With indexation, the indexed cost (approx. Rs 1.08 crore) is actually higher than the sale price, resulting in a capital loss.
- Conclusion: The 20% with indexation option results in zero tax liability.
In summary, for properties held for a significant period, the 20% tax with indexation is generally the more advantageous option due to the substantial reduction in the taxable gain. Taxpayers should calculate both scenarios to ensure they choose the one that minimizes their tax obligation.
