Before the announcement of Budget 2024, there was an indexation benefit under which the taxpayers had to pay taxes on the long-term capital gain (LTCG) at 20 per centon properties after adjusting the inflation as per the adjustment applicable according to the cost of inflation index. After budget 2024, the indexation benefit is removed and the LTCG tax has been decreased to 12.5per cent. For example, suppose you had bought a property in 2002 for Rs 10lakh and sold it in December 2023 for Rs 60 lakh. Let’s find out how it will impact the LTCG tax when there is and without indexation benefit.

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Scenario 1: With Indexation benefit

The cost of inflation index in 2002 was 105 and in 2023-24 it was 348. So, the acquisition cost of your property would be Rs 10lakh x (348/105)= Rs 33,14,286. LTCG in this case would be Rs 60 lakh less Rs 33.14lakh= Rs 26.86

Tax on LTCG= Rs 26.86 lakh x 20per cent= Rs 5.4 lakh

Scenario 2: Without Indexation benefit

Cost of acquisition= Rs 10 lakh

LTCG= Rs 60 lakh Less Rs 10 lakh= Rs 50 lakh

Tax on LTCG= Rs 50 lakh x 12.5per cent= Rs 6.25 lakh

When comparing scenario 1 and scenario 2, we can see that the LTCG tax may increase by a small amount without indexation in some cases. However, if comparing between indexation and non-indexation based LTCG tax impact in detail, then you’ll find out that impact would depend on several factors, such as the size of capital gain, duration of investment, etc. In some cases, the property seller may pay lower tax compared to what it needs to pay with indexation.In terms of impact on the beneficiary of the inherited property, there are a few more points that one needs to check.

Impact On Inheritance Of Property Bought Before 2001

If the property has been bought before 2001, will be taxed based on fair market value along with the indexation benefit. So, there won’t be a significant impact on such properties.

Impact On The Inheritance Of Property Bought After 2001

If the property is bought after 2001, it will be taxed at 12.5per cent without indexation benefit. With missing indexation benefits, the impact will be more on such transactions where the LTCG is not very high as now they have to pay tax on it whereas under the previous rule, they might have avoided the tax due to inflation adjustment.

Impact On Properties That Would Be Bought After The Budget 2024 And Inherited In The Future

Properties which are bought after the budget 2024 and inherited in future will not get any indexation benefit. The quantum of LTCG tax would simply depend on how much capital appreciation happens when it is sold.

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What Beneficiaries Can Do To Save LTCG Tax?

The beneficiary of inherited properties in some cases pays a lower tax than before, whereas in some cases they would be paying a higher tax. Tax incidence will depend on many factors such as how much property prices rise during the holding period, the acquisition cost of the property, etc. The beneficiaries can still get the tax deduction benefit u/s 54 and Sec 54F of the IT Act to save tax on the capital gain, so they can plan their course of action as per their financial comfort.

The author is an independent financial journalist.