FAQ on 20% Vs. 12.50 % Tax Rate on Long-Term Capital Gains on Immovable Property

 

1.  What exactly changed in the LTCG rules from 23 July 2024?

•  Before 23 July 2024: Sale of immovable property (held for ≥2 years) was taxed at 20% with indexation.

•  After 23 July 2024:

      •   Default: 12.5% tax without indexation.

     •   Option (for assets bought before 23 July 2024): Continue with 20% with indexation if it results in lower tax.

2.  What is meant by “grandfathering”?

•  If you purchased the immovable property before 23 July 2024, you can choose:

1.  20% with indexation, or

2.  5% without indexation.

•  You can compute both ways and pick the one giving lower tax.

3.  If I buy property after 23 July 2024, can I claim indexation?

•  No. For property purchased on or after 23 July 2024, LTCG will always be taxed at 12.5% without indexation. No choice available.

4.  Who can use this 20% vs 12.5% option?

•Only:

     •   Resident Individuals, and

     •   Hindu Undivided Families (HUFs)

•   Not available to:

       •   Companies, Firms, LLPs, AOPs, BOIs

       •  Non-residents

5.  Is this benefit for all capital assets?

•   No. Only for land and building (residential, commercial, plot, etc.).

•   Other assets (gold, shares, jewellery, etc.) → Always 12.5% without indexation.

6.  Can I set off capital loss if I use the 20% with indexation method?

•   Loss after indexation → Cannot be set off or carried forward. It lapses.

•   Loss without indexation → Can be set off or carried forward as before.

7.  How do I decide which option to pick?

1.  Compute indexed gainand tax @ 20%.

2.  Compute non-indexed gainand tax @ 12.5%.

3.  Choose the lower tax amount.

8.  Did the computation method change under Section 48?

• The mechanism in Section 48 is mostly unchanged except that indexation is now restricted to:

       •  Transfers before 23 July 2024, or

•   Eligible grandfathered cases after that date.

•   For most post-23 July sales, cost will be taken without indexation; only the tax rate choice is given in Section 112.

9.  What about Section 54 and 54EC exemptions?

•   Key change: Since gains are now computed without indexation for the purpose of exemptions, the LTCG figure will be higher.

•   This means:

      •   You’ll have to reinvest a larger amount to claim full exemption.

      •   For 54EC bonds, the ₹50 lakh limit will make full exemption harder.

10.  Does the 2-year holding period for LTCG still apply?

•   Yes. Holding <2 years → Short-Term Capital Gains, taxed at your slab rate.

11.  If I bought property before 1 April 2001, can I still use FMV as on 1 April 2001?

•   Yes, you can still take the lower of:

      •   Stamp duty value on 1 April 2001, or

      •   Fair market value on that date.

12.  What’s the “surcharge trap” I keep hearing about?

•   The tax rate choice doesn’t remove surcharge.

•   If your total income (including the capital gain) exceeds ₹50 lakh, surcharge applies as per slab:

    •   Up to ₹1 crore → 10% surcharge

    •   ₹1–2 crore → 15%

    •   ₹2–5 crore → 25%

    •   Above ₹5 crore → 37% (but capped at 15% for certain sections like 111A/112/112A – not for these property gains)

13.  Numerical Example – Grandfathered Property

Facts:

•   Purchase price: ₹1 crore (FY 2010–11)

•   Sale price: ₹3 crore (Aug 2024)

•   CII purchase year: 167, CII 2024–25: 363

Option A – 20% with indexation:
Indexed cost = ₹1 crore × (363 ÷ 167) = ₹2.173 crore
Gain = ₹3 crore – ₹2.173 crore = ₹0.827 crore
Tax = 20% × ₹0.827 crore = ₹16.54 lakh

Option B – 12.5% without indexation:
Gain = ₹3 crore – ₹1 crore = ₹2 crore
Tax = 12.5% × ₹2 crore = ₹25 lakh

Choose Option A (lower tax).

14.  Bottom line

•   The new law is simpler in writing but trickier in planning.

•   Buy before 23 July 2024? You have a choice – do the math both ways.

•   Buy after 23 July 2024? It’s always 12.5% without indexation.

•   Watch out for loss treatment rules and surcharge thresholds.