Homeowners Who Sold Properties Purchased Before July 2024 Must Weigh Tax Implications of 12.5% vs. 20% Long-Term Capital Gains Rates

Taxation of Property Sales Becomes More Nuanced After Changes to Long-Term Capital Gains Rules

The taxation of property sales has undergone significant changes with the recent amendments to long-term capital gains (LTCG) rules. As of July 23, 2024, property owners who acquired real estate before this date now have the option to choose between paying 12.5% tax without indexation or 20% tax with indexation benefits. This shift makes tax calculations and exemption decisions more crucial than ever.

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Calculating Tax on Capital Gains

A reader recently sold their flat in December 2025 for Rs 1.50 crore, which was acquired in April 2021 for Rs 1.05 crore. The reader is undecided whether to invest the capital gains in capital gains bonds or pay tax. To help the reader understand the tax implications, let's break down the calculation.

Taxation of Long-Term Capital Gains

Since the house was sold after 24 months, the profits will be taxed as long-term capital gains. The benefit of indexation has been removed for all LTCG computation provisions, except for the limited purpose of computing the tax payable in respect of LTCG arising from the sale of land and buildings by a resident individual and an HUF.

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Tax Calculation

To calculate the tax, we need to compute the capital gains. The cost of acquisition is Rs 1.05 crore, and the sale price is Rs 1.50 crore. The cost of improvement, if any, is not mentioned, so we will assume it is zero. The capital gains are computed by reducing the cost of acquisition from the sale price:

Exemption under Section 54EC

To claim exemption under section 54EC, the reader must invest the plain LTCG in capital gain bonds. The maximum investment in capital gains bonds in a financial year to claim exemption under section 54EC is Rs 50 lakhs. In this case, the reader can invest Rs 45 lakhs (Rs 45 lakhs out of Rs 45 lakhs, as the remaining amount is part of the long-term capital gain). However, the reader should note that the investment limit is Rs 50 lakhs.

Tax Rates under Section 112

Section 112 of the Income Tax Act 1961 provides for the rate at which LTCG will be taxed. A resident individual or an HUF has the option to pay tax on LTCG arising from the transfer of a land or building acquired prior to July 23, 2024, either at 12.5% on unindexed LTCG or at 20% of the indexed LTCG.

Indexed Cost and Tax Calculation

The cost inflation index (CII) for the financial year 2021-2022 is 317, and for the financial year 2025-2026 is 376. The indexed cost of the house bought in 2021 for Rs 1.05 crore comes to Rs 1.24 crore. The indexed profits come to Rs 25.45 lakh. Tax on indexed profits of Rs 25.45 lakh at 20% comes to Rs 5.09 lakh.

Tax on Unindexed Long-Term Capital Gains

The tax on unindexed LTCG of Rs 45 lakhs at 12.5% comes to Rs 5.62 lakh. Since the tax on indexed profits is lower than on unindexed profits, the reader should opt for paying tax on indexed LTCG.

In conclusion, the reader should pay tax on indexed LTCG, which amounts to Rs 5.09 lakh, rather than on unindexed LTCG, which amounts to Rs 5.62 lakh.