Surcharge Glitch Undermines New 12.5% LTCG Benefit on Property Sales
A well-intended tax relief introduced in 2024 for real estate sellers has taken an unexpected turn. The new 12.5% long-term capital gains (LTCG) rate on property sales – applicable from July 23, 2024 – was expected to reduce the tax burden. But a technical mismatch in how surcharge is applied is now leading to a higher tax outgo for many taxpayers, especially those with total income above ₹50 lakh.
What Has Changed?
Under the new provision, individuals and HUFs can now opt to pay LTCG tax at 12.5% without indexation, instead of the usual 20% with indexation, on sale of land or buildings. However, this benefit is only partial – it does not extend to surcharge computation.
In short, while the base tax is lower, the surcharge is still calculated on the total income, including gains taxed at the reduced 12.5% rate. This leads to a higher overall tax liability in many cases.
Illustration of the Problem
Let’s take an example:
• Property sold: ₹05 crore
• Indexed cost (for 20% route): ₹33 crore
➤ Loss: ₹28 lakh → No tax
• Non-indexed cost (for 12.5% route): ₹8 crore
➤ LTCG: ₹25 lakh → Tax: ₹3.1 lakh at 12.5%
Add this to a ₹30 lakh salary:
• Tax on salary: ₹67 lakh
• Surcharge (10% as income crosses ₹50 lakh): ₹56 lakh
• Cess: ₹24 lakh
• Total tax payable: ₹49 lakh
Despite opting for the “lower” 12.5% tax rate, the total tax payable is significantly higher — simply because surcharge was triggered.
The Technical Glitch
The issue arises from how the income-tax utility computes surcharge. It treats LTCG under 12.5% as part of total income, thereby pushing the taxpayer into higher surcharge brackets (10%, 15%, 25%, or 37%).
Unfortunately, while the law allows the concessional 12.5% rate, it does not explicitly offer surcharge relief. And the software applies surcharge as if the full amount is taxable at standard rates – defeating the benefit.
Implications for Taxpayers
This glitch disproportionately affects:
• Individuals with income above ₹50 lakh
• Taxpayers choosing the 5% non-indexed route
• Those unaware of how surcharge interacts with LTCG
Those with lower incomes may still benefit from the new option. But for higher earners, the 20% rate with indexation might actually result in lower total tax due to lower taxable capital gains and capped surcharge.
What You Should Do Before Filing
1. Compare both options– 12.5% without indexation and 20% with indexation – in actual numbers.
2. Check if your total income (including capital gains)breaches ₹50 lakh, ₹1 crore, or ₹2 crore thresholds, which attract 10%, 15%, or 25% surcharge.
3. Work with your tax preparerto simulate both routes using updated software before deciding.
4. Retain all supporting documents- sale deed, cost records, improvement costs, and indexation proof – especially if opting for the 20% route.
Awaiting Clarification
While this issue has come to light in multiple tax discussions, no official clarification or software update has been issued yet. Until then, the surcharge anomaly is likely to continue, unless addressed in future circulars or Finance Act amendments.
Conclusion: Relief That Could Turn into Burden
The 12.5% LTCG rate was designed to simplify and ease taxation for property sellers. But unless surcharge is aligned accordingly, it may end up being more of a burden than a benefit, particularly for middle and high-income taxpayers.
Tax planning must now include surcharge impact analysis, not just the base rate comparison. Until clearer rules or software fixes emerge, caution and calculation are the best tools in a taxpayer’s arsenal.
