Following concerns that this could increase the tax liability for real estate investors, the government introduced a grandfathering clause to allow indexation on properties bought before 23 July 2024—the day the budget was presented. Under the clause, if the new 12.5% tax rate results in a higher liability than the previous 20% rate with indexation, the excess tax will be ignored.
However, if the indexation results in a capital loss— the cost of acquiring a property is higher than the sale price — it can no longer be set off against capital gains.
“There can be no capital loss arising due to indexation as indexation is only for the computation of tax liability and not for the computation of capital gain,” explained Gautam Nayak, partner at CNK & Associates. “Capital loss computed without indexation can be set off against other capital gains.”
Here is a look at how capital losses can be used to reduce capital gains and carried forward under the new tax rate; and when the indexation benefit with the older tax rate can help save more tax.
Setting off, carrying forward gains
If the capital loss occurs without indexation, it can be utilized to set off gains and the unabsorbed losses can be carried forward.
Assuming Mr. A bought a property for ₹1 crore in FY02 and sold it for ₹80 lakh in FY25. Let’s assume Mr. A made capital gains of ₹1 crore from 2nd property. He can offset the ₹20 lakh capital loss against gains from the second property. He will pay tax on net capital gains of ₹80 lakh.
If there are any unabsorbed losses — the capital loss is higher than the capital gain — such losses can be carried forward and set off against capital gains in eight subsequent financial years.
“Long-term capital losses can be set off against long-term capital gains. Short-term capital losses can be set off against both long- and short-term capital gains,” Nayak said.
Before budget 2024, even capital loss derived from indexation could be offset or carried forward. Here is how it worked:
Assuming Mr. A bought a property for ₹1 crore in FY02 and sold it for ₹2.46 crore in FY25, the annualized growth rate was 4%. The cost of acquisition, indexed or adjusted for inflation, is ₹3.63 crore, resulting in a net capital loss of ₹1.17 crore.
If Mr. A made a capital gain of ₹3.17 crore from a second property in the same financial year, he could set it off with the ₹1.17 crore capital loss computed in the first property and pay taxes on net gains of ₹2 crore. If there were any unabsorbed capital losses, these could be carried forward for future set-offs in the earlier system.
If Mr. A had capital gains of ₹50 lakh from his stock investments, can he use capital loss computed by indexation on his property to set it off? “In the present tax scheme, the ₹1.17 crore capital loss from the first property cannot be set off against gains from other properties or stocks or other asset classes. Nor can any unabsorbed losses be carried forward,” said Prakash Hegde, a Bengaluru-based chartered accountant.
Indexation benefit
Indexation benefit was allowed so that the capital gain offered for taxation is not inflation-driven but represents the asset’s actual capital appreciation.
Indexation benefit is still allowed with conditions. The first one — as mentioned earlier — the property should be purchased before 23 July 2024.
“Only resident Indians and Hindu Undivided Family (HUF) can claim indexation benefit. It is only available for computation of tax liability, not for other purposes like exemption. Non-resident Indians (NRIs) or any non-individual taxpayers (companies, partnerships, etc.) won’t be able to claim indexation. The indexation benefit will be available for land or buildings or both,” said Balwant Jain, a Mumbai-based tax and investment expert.
According to Siddharth Deb, director-people advisory services, Ernst & Young, “Both residential and commercial property will be eligible for indexation benefit as long as the property has been acquired before 23 July 2024.”
With or without indexation
For investors, when is indexation with the old rate more tax-efficient than the new rate without the benefit and vice-versa?
“If we consider the 20% scenario, the capital gain is computed after the original cost has been adjusted for inflation (indexed), and this can potentially reduce the taxable gain,” said Shobhit Agarwal, managing director and chief executive officer at Anarock Capital. “Conversely, the 12.5% rate is levied on the full difference between the sale price and the original purchase cost, without adjustments. If appreciation overtakes inflation substantially, the overall tax payable at the lower flat rate would be better than the higher tax rate on the indexed amount.”
Let’s again assume that Mr. A bought a property in FY02 for ₹1 crore. He is selling it in FY25. What will be his tax liability under the old 20% LTCG tax rate with indexation and the new 12.5% LTCG tax rate without indexation.
The answer will depend on the appreciation of the property — whether it is closer or higher than the inflation rate.
Assuming Mr. A sells the property for ₹3.81 crore in FY25 at an annual growth of 6%. The old tax scheme of 20% with indexation will help him save more taxes as the property price is largely driven at a near-inflation rate. He will save ₹31.45 lakh with the old rate of 20% with indexation. Similarly, assuming he sells it for ₹5.8 crore, where the annual growth rate is 8% (still closer to the inflation rate), he will save ₹16.06 lakh with the indexation benefit.
But things start to change at higher growth rates. Assuming a sale price of ₹8.95 crore and a growth rate of 10%, the new rate of 12.5% without indexation would be more tax-efficient. He will save ₹7.05 lakh at the new lower rate.
Similarly, if the sale price is ₹13.55 crore after factoring in 12% growth, the 12.5% tax rate without indexation will lead to savings of ₹41.54 lakh.
Under-construction property
If you bought a property that was under construction and remained so until 23 July 2024, whether you can claim indexation benefit on such a property may not be straightforward.
“What constitutes as date of acquisition in the case of an under-construction property has always been debatable with conflicting judicial precedents which are fact and documentation specific,” said Parizad Sirwalla, partner and head of global mobility services tax, KPMG India. “In general, immovable property is construed to be acquired on the date on which it is completed and all rights transferred. So if that has not happened before 23 July 2024, the indexation benefit may not be available.”
According to Hegde, “If the land on which the construction is to be undertaken has been registered before 23 July 2024, it implies that the undivided interest in the land has been acquired. The indexation benefit can be considered under such situations to limit the tax burden. In normal situations, an immovable property needs registration of ownership.”
Takeaways
The higher the growth of your property over and above the inflation rate, the more likely that the new tax rate of 12.5% will yield more tax savings.
“The 12.5% LTCG tax rate without indexation is more beneficial, particularly for investors whose property values have appreciated beyond the inflation rate,” said Vivek Rathi, national director-research at Knight Frank India.
Remember, the indexation benefit is only available as a ‘grandfathering’ clause for older property purchases. The new rate on properties bought after 23 July 2024 remains 12.5% without indexation. However, it allows setting off capital losses against capital gains, and unabsorbed losses can be carried forward.
