The Income Tax (I-T) Department has clarified the acquisition cost of real estate purchased before 2001 for the calculation of long-term capital gains (LTCG) tax. For properties acquired prior to April 1, 2001, taxpayers can choose between the fair market value (FMV) as of April 1, 2001, or the actual cost of the property, provided the FMV does not exceed the stamp duty value. This clarification aims to provide a clear basis for calculating LTCG, which has seen recent changes in tax rates and indexation benefits.
In the financial year 2024-25 budget, the LTCG tax on real estate was reduced from 20 per cent to 12.5 per cent. However, this benefit came at the cost of eliminating the indexation benefit for properties purchased after April 1, 2001. Indexation allowed taxpayers to adjust the acquisition cost for inflation, thereby reducing the taxable gains. For properties bought before 2001, the option to use FMV (not exceeding the stamp duty value) or the actual cost as of April 1, 2001, remains. This choice is significant as it allows taxpayers to potentially reduce their taxable gains by selecting the higher value. The I-T Department illustrated this with an example involving a property purchased in 1990 for ₹5 lakh. As of April 1, 2001, the property’s stamp duty value was ₹10 lakh, and the FMV was ₹12 lakh. If sold after July 23, 2024, for ₹1 crore, the acquisition cost for tax purposes would be ₹10 lakh (the lower of the stamp duty value or FMV).
The indexed cost of acquisition for the 2024-25 fiscal year would be ₹36.3 lakh, calculated using the cost inflation index of 363. Thus, the LTCG would be ₹63.7 lakh (₹1 crore minus ₹36.3 lakh), resulting in an LTCG tax of ₹12.74 lakh at the 20 per cent rate. This clarification is crucial for taxpayers looking to optimise their tax liabilities on the sale of long-held properties. By allowing the choice between FMV and actual cost, the I-T Department offers a mechanism to potentially reduce tax burdens through strategic valuation. This measure is particularly relevant for properties in areas where market values have significantly appreciated since 2001. In a social media post, the I-T Department confirmed that taxpayers could select the more beneficial valuation method, providing a significant advantage in managing LTCG tax obligations. This announcement aligns with the government’s broader efforts to streamline tax regulations and offer clarity to taxpayers.
