New Tax Strategy: Reinvest Property Gains To Avoid LTCG Tax

The recent Budget 2024 has removed the indexation benefit for properties purchased after 2001, leading to increased long-term capital gains (LTCG) tax when these properties are sold.

Tax Exemption Strategy
Despite the removal of indexation benefits, property sellers can still avoid LTCG tax by reinvesting the capital gains from the sale into a new property. Revenue Secretary Sanjay Malhotra confirmed, "Tax kicks in only if the gains are not reinvested in a house. If you sell a house and you buy a house using only the gains, there is no taxation," as reported by The Economic Times.

Impact of Indexation Removal
The indexation benefit allowed sellers to adjust the sale profit by the inflation rate, reducing taxable income significantly. Without this benefit, properties purchased after 2001 are now subject to a 12.5% LTCG tax upon sale, a reduction from the previous 20% tax rate.

Understanding Indexation
Indexation adjusts the purchase price of an asset for inflation, using the Cost Inflation Index (CII) published annually by the government. This adjustment lowers taxable profit, but with the new tax rate rationalized to 12.5%, the indexation benefit no longer applies. This change, as outlined in the budget document, aims to simplify capital gains calculations but may lead to higher taxes despite the lower rate.

Expert Opinions
While the new tax rate is lower, experts warn that the removal of indexation could result in higher overall taxes for sellers. Although the intent is to simplify the tax process, the changes may present challenges for individuals engaged in property sales and real estate transactions.